Asset Sale VS Share Sale
There can be a lot of confusion when it comes to understanding the difference between an asset sale and a share in Canada so here is a brief description of how this works for those that do not know.
The overriding idea here is that sellers want to sell their shares and buyers want to buy assets. There are reasons for this but the majority of the reasons are tax related.
When shares are sold of a corporation, everything from the company name to the liabilities are transferred including assets and employees. Absolutely all parts of the company are transferred between the parties without exception.
This is better for the seller and worse for the buyer because of unknown liabilities. It is possible for a corporation to be sold without the buyer’s knowledge of some future liabilities such as unfiled lawsuits or upcoming tax audits. Sometimes, the issue might be the fault of the previous shareholders, corporations are entities that are separate from owners and will be held accountable.
However, with that being said, if the seller behaved fraudulently, they may be held accountable but there is no guarantee that you will be able to find them and settle accordingly.
One of the main reasons a corporation’s owners want to sell shares is because of the $750,000 per person Canadian Capital Gains Exemption on the sale of a qualifying small business share.
If you have capital gains from the sales of shares of up to $750,000 then a deduction against such gains is available to you. If you are unsure whether you qualify for this exemption, check with your contact to find out.
When the assets of a corporation are sold, all liabilities and tax filings remain with the corporation. In this case, the buyer assumes no responsibility for the prior activities or filings of the corporation.
When assets are sold they are sold at the current market value. This usually gives the new buyer a higher tax cost base for assets to be written off over time compared to the depreciated value remaining on a corporation’s books after years and years.
Upon selling their assets, the seller must swear under oath that all of the liabilities have been paid before the sale can go through.
These are only a few of the reasons that sellers want to sell shares and buyers want to buy assets but it should provide an understanding of some of the fundamental differences.