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:
- Sell the individual assets, pay off the liabilities and taxes and distribute the remainder as dividends
- 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:
Asset | Explanation |
Accounts Receivable |
There is a joint election under section 22:
|
Inventories |
|
Prepaid Assets |
|
Non-depreciable capital assets |
|
Depreciable capital assets |
|
Eligible Capital Property |
|
Calculating the Taxes on Income generated by Disposal
Type of Income | Combined Tax Rate |
Active Business Income ≤500,000 | 15% |
Active Business Income >500,000 | 28% |
Aggregate Investment Income | 46% |
Refundable Portion of Part I Tax | 26.67% |
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 Sale | Share Sale |
Pros • Higher UCC balance for the buyer; since assets purchased with after-tax money; higher UCC = higher CCA deduction Cons • More work; need to sell assets | Pros • QSBC shares are eligible for the $848,252-lifetime capital gains deduction Cons • Liabilities assumed by the new buyer |