A common issue for those considering the purchase of a new
business is whether to also buy the company's shares or assets.
The vendor is usually motivated to sell the shares because they can
use their capital gains exemption on the capital gains of the
shares. The problem with buying shares is that the purchaser is
then responsible for old liabilities to suppliers, employees or the
government (probably the biggest concern), and potentially for
previous work. Even more problematic, this liability is unknown in
Fortunately, there are some measures that can be taken to
minimize this risk. In most business purchases, there will be
holdbacks of the purchase price for anywhere from six months to a
year. In some cases, there's a vendor take-back, so the
purchase price is paid over a number of years. This gives the
purchaser the ability to adjust for any potential liabilities that
The liability is enormous when you're buying shares, but if
you set up a new corporation, you have far less liability, as you
are then only acquiring the business' assets. You start your
own HST account and your own payroll accounts, and thus don't
assume any liabilities related to past work. In essence, you're
using an old company's assets to start a new company.
When new business owners consider purchasing shares versus
assets, the one thing we advise is: if you buy assets that have
increased in value, you can depreciate them at the higher value now
for fair market value. You could run into a situation where
somebody has a building that they paid $300,000 for 15 years ago
and now that building is worth $500,000. On the purchase of these
assets, you get to bump up that building to the $500,000 value.
When you do a share sale, you don't get that bump in asset
As for HST payments, the rule is that you can file an election
on the purchase of assets if you're acquiring substantially all
of the assets to run a business. For CRA, "substantially
all" is 90%, so if you acquire 90% or more of a business'
assets, you can elect for HST and not pay HST on the purchase. But
let's say a company has multiple entities under one name and
you buy part of it – then you're not buying substantially
all of the business. As a result, you will have to pay HST on the
purchase of these assets.
In the end, different purchasers have different needs, but
it's crucial that you understand the tax and liability
implications of your options before finalizing a deal.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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