Sale of Assets of a Corporation Vs.
Sale of Shares of the Corporation

Sale of Assets of a Corporation vs. Sale of Shares of the Corporation

General

When the shareholder is interested in selling the business, he or she can has two options:

  1. Sell the individual assets, pay off the liabilities and taxes and distribute the remainder as dividends
  2. Sell the shares of the corporation

Sale of Assets of a Corporation

Why would corporations sell assets rather than the shares?

  • The business may not be profitable, and therefore may not be attractive to investors
  • The business may be too specialized and cannot be carried on by a new shareholder
Step 1: Sale of Assets by the corporation and pay taxes on income generates by sale

The corporation will sell the assets of the corporation:

AssetExplanation
Accounts Receivable
  • The sale of accounts receivable is treated as a capital transaction.
  • Businesses often sell accounts receivable at a capital loss.
  • Therefore only one-half of the capital loss will be deductible.
  • Since purchaser never included the income from the A/R, they will not be able to claim a reserve for bad-debts

There is a joint election under section 22:

  • This will treat the sale as a non-capital transaction
  • Section 22 can only be used when at least 90% of the business assets are being sold
  • 100% of the losses will be deductible by the seller as business loss
  • The purchaser can claim a reserve for bad-debts
Inventories
  • Gain/loss will be treated as active business income
Prepaid Assets
  • Gain/loss will be treated as active business income
Non-depreciable capital assets
  • There will be a capital gain or loss
  • The taxable capital gains/loss are considered aggregate investment income
  • Non-taxable Capital gains will increase the capital dividend account (CDA)
Depreciable capital assets
  • CCA Recapture is considered active business income
  • The taxable  capital gains/loss are considered aggregate investment income
  • Non-taxable Capital gains will increase the capital dividend account (CDA)
Eligible Capital Property
  • 50% of economic gains are considered active business income
  • The recapture is also considered active business income
  • 50% of the economic gains increase the CDA
  • Sale of goodwill is an eligible capital property; usually goodwill will not have a tax value in the CEC pool; the disposal will still generate recapture and/or economic gains
Calculating the Taxes on Income generated by Disposal
Type of Income Combined Tax Rate
Active Business Income ≤500,00015%
Active Business Income >500,00028%
Aggregate Investment Income46%
Refundable Portion of Part I Tax26.67%
Step 2: Residual amount after taxes and liabilities are paid off gets distributed to shareholder

Amount available to distribute to shareholder = Proceeds of Disposition – Liabilities – Taxes + RDTOH

Step 3: Determine taxable dividends and type of dividends
Amount available to distribute (step 2)$xxx
less: Paid-up Capital (PUC)(xxx)
Deemed Dividends$xxx
less: Capital Dividend Account (CDA)(xxx)
Taxable Dividends $xxx
less: GRIP = Eligible Dividends(xxx)
Non-Eligible Dividends $xxx
Step 4: After Tax money in the hands of the shareholder
Amount available to distribute (step 2)$xxx
less: tax on eligible dividends (30% @ top bracket)(xxx)
less: tax on non-eligible dividends (33% @ top bracket)(xxx)
After tax money$xxx

Sale of Shares

  • Sale of shares is the easiest way to sell a business
  • There will be a taxable capital gain (or an allowable capital loss) on the sale of shares
  • Note that if the shares are QSBC shares, it will be eligible for the $750,000 life time capital gains deduction
  • After tax money = Proceeds – tax paid on the capital gain

Sale of Assets vs. Sale of Shares

  • The shareholder should choose the method that yields the highest after tax money (assuming all else equal)
  • Here are some factors to consider:
Asset SaleShare Sale

Pros

•  Higher UCC balance for the buyer; since assets purchased with after-tax money;  higher UCC = higher CCA deduction
•  No liabilities assumed by the buyer
•  Capital Gains generate CDA balance to distribute dividends tax-free

Cons

•  More work; need to sell assets

Pros

•  QSBC shares are eligible for the $848,252-lifetime capital gains deduction
•  AOC rules apply so the buyer can carry fwd. non-capital losses (w/ streaming rules)
•  Easier to implement

Cons

  Liabilities assumed by the new buyer
•  No asset cost bump up

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