Canada: Purchase Of Business Assets Or Shares: Some Canadian Tax Considerations

Last Updated: July 12 1999
Article by David W. Steele

Anyone considering buying an existing Canadian business will often be faced with the choice of either purchasing the business assets directly or buying the shares of an existing Canadian company that owns the business assets. This article outlines briefly some of the tax issues to consider when making the choice of "assets vs shares", from the perspective of both the purchaser and the vendor.


In general, the purchase of assets provides an opportunity to revalue the acquired assets to market price. In a share acquisition, no step-up is possible for depreciable assets, although tax attributes, such as operating losses and investment tax credits carried forward, may be available.

The purchaser of business assets is entitled to claim depreciation for tax purposes, known as capital cost allowance ("CCA"), based on the cost of any depreciable assets included in the purchase. However, the CCA deduction is limited in the year the asset is acquired to one-half of the normal rate. The purchaser will also be entitled to write off, on a declining-balance basis, three-quarters of the cost of any goodwill and certain other intangible property acquired in the transaction.

Interest expense incurred by the purchaser in acquiring the assets, assuming they are used to produce income, should be deductible for tax purposes.


The vendor of the business assets is required to recognize gains or losses arising on the disposition of property involved in the transaction. Consequences to the vendor on the disposal of business assets depend on the following factors:

    1. The nature of the gain or loss – capital or income;
    2. The proceeds of disposition of the property; and
    3. The vendor’s tax rate and whether it has utilized tax loss carryforwards.

The tax consequences to a vendor on the disposition of depreciable assets will also depend on the capital cost and the depreciated cost of the property for tax purposes, whether the vendor has any remaining assets in the particular CCA class, and the undepreciated balance of the class after the disposition.

A vendor with no depreciable assets remaining in a particular class after the disposition is required to recognize as ordinary income any recapture of CCA previously claimed. Although a vendor may be permitted to deduct as a terminal loss any excess of tax-depreciated value over proceeds of disposal, restrictions applicable to buildings may effectively allow a deduction of only three-quarters of the terminal loss incurred. Special rules that apply when land and buildings are sold effectively net any terminal loss on the building and capital gain on the land.

If a sale gives rise to a receivable that is not due until a future tax year, it may be possible to defer paying tax on the profit element of the sale. The reserve provisions allow for a reserve over a maximum period of three years for disposition that give rise to ordinary income, and over five years for capital property.

A vendor of goodwill and certain other intangible property is required to include a portion of the proceeds in income in the year of sale, even if proceeds are not received immediately. In general, three-quarters of such proceeds will be included in the income of the vendor.

Share Acquisition

Acquisition of control of a Canadian corporation through the purchase of its shares can have significant effects on the corporation’s tax position. For example, operating losses arising from the business carried on before the acquisition of control may be applied only against future income from that business and similar businesses. Unused capital losses cannot be carried forward for application after the change of control. The acquired company will be deemed to have a tax year-end immediately before the change of control, for which it must file a return and pay any taxes owing.

Generally, interest expense on funds borrowed to acquire shares in a corporation is deductible to the borrower. Accordingly, a non-resident is often advised to set up a Canadian holding company to borrow the funds required to make a share acquisition. Once the acquisition has been completed, it might be possible to have the acquired company wound-up into or merged with the holding company, thus enabling interest expense to be offset against the acquired company’s earnings.

The seller of shares may realize a capital gain or capital loss on the shares, which is included in income in the usual manner.

Buyer and Seller

The table below summarizes the consequences to arm’s-length buyers and sellers in a cash acquisition.

Since the excess of the purchase price over the underlying values of the assets purchased is partially available for future deduction on an asset acquisition (i.e. amortization of goodwill) but not on a share acquisition, a prospective purchaser may find an asset acquisition more attractive. On the other hand, the availability of losses and investment tax credits to be carried forward may suggest that a share purchase would be preferable. The vendor will frequently prefer a sale of shares in order to realize a capital gain and be divorced from all corporate involvement.

There are numerous other tax and non-tax issues that should be considered by investors, their legal counsel, and their accountants, before acquiring a business enterprise in Canada. PricewaterhouseCoopers LLP can advise and assist in matters relating to corporate reorganizations and acquisitions.

Consequences of Cash Acquisition

Asset Purchase

Buyer: Interest expense incurred acquiring the assets should be deductible for tax purposes.

Seller: Possible deferral of tax if proceeds are receivable in a subsequent year.

Depreciable Property:

Buyer: Tax depreciation ("CCA") is claimable, based on purchase price of asset.

Seller: May have recaptured depreciation or terminal loss. Also, may have capital gain where sale price exceeds original cost.

Capital Property:

Buyer: Purchase price becomes tax cost of property.

Seller: Capital gain or loss on disposal.


Buyer: Three-fourths of purchase price amortizable on 7% declining-balance basis.

Seller: Three-fourths of sale proceeds is credited against unamortized goodwill balance, with any excess included in income.


Buyer: Purchase price deductible when goods are re-sold.

Seller: Proceeds result in income.

Accounts Receivable (if election filed):

Buyer: May deduct debts that become bad or an allowance for doubtful debts. Discount from face value is included in income.

Seller: Discount from face value is deductible.



Buyer: Write-down of depreciable and other capital assets if tax cost exceeds fair market value. Deductibility write-down is subject to same constraints as business operating losses.

Business loss carryforwards and other tax attributes remain available for deduction by purchased corporation if it continues same business.

Related interest expense is deductible if transaction is properly structured.

Seller: Capital gain or loss on disposal of shares (assuming not a share dealer or trader).

Possible deferral of tax if proceeds are receivable in a subsequent year.



* * * * * * * * * * * * * * * *


The information provided herein is for general guidance on matters of interest only. The application and impact of laws, regulations and administrative practices can vary widely, based on the specific facts involved. In addition, laws, regulations and administrative practices are continually being revised. Accordingly, this information is not intended to constitute legal, accounting, tax, investment or other professional advice or service.

While every effort has been made to ensure the information provided herein is accurate and timely, no decision should be made or action taken on the basis of this information without first consulting a PricewaterhouseCoopers LLP professional. Should you have any questions concerning the information provided herein or require specific advice, please contact your PricewaterhouseCoopers LLP advisor

PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP and other members of the worldwide PricewaterhouseCoopers organization.




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