All profits of real estate held in a year or less, stocks or receivables are taxed at normal income rates. The amounts paid under competitive conditions are a decent income for you and will be depreciated by the buyer for more than 15 years, unless the IRS successfully argues that they are actually part of the purchase price. The amounts paid under consulting contracts are for you a regular income and are currently deductible for the buyer. In the event of a share sale, the current owner sells the shares of the company to the buyer. This option is often the preferred choice of sellers because of the favourable tax effects. A share sale may allow the seller to defer tax on taxable profits. This is not always possible when selling assets. There are two ways for a buyer to acquire a business, either by buying shares or by buying assets. Although the two structures are able to achieve the same overall business objective, there are pros and cons for each structure, as well as fundamental differences in both legal efficiency and tax treatment.
In general, share purchases seek much more balanced guarantees, as the buyer inherits all the liabilities of the company, whether they are known or not. In the event of an asset acquisition, the buyer will seek certain guarantees, taking into account the assets acquired. The buyer and seller will negotiate exactly what assets the buyer will buy from the business after the closing of the business. Assets that are not agreed to be acquired by the purchaser under the asset acquisition contract are retained by the seller. By purchasing shares, the buyer also acquires outstanding debts, including tax and legal debts, which opens up a higher risk to the buyer. Buyers are encouraged to perform strict due diligence to ensure that their purchase does not come with unexpected skeletons in the closet. Safeguard clauses for tax and legal commitments may also be included in the sales and sale agreement as a standard element of a share sale. If, as an individual, you sell your shares in the company, your product – beyond the adjusted cost base of the shares and certain expenses related to the sale of the shares – translates into a capital gain that is taxable by only 50%.
When these shares are considered to be shares of qualified small businesses (QSBC), you can generally apply for a lifetime exemption to protect all or part of the tax benefit. In 2020, this lifetime capital gains exemption for QSBC shares is $883,384 and is only available to people residing in Canada. The above are just a few of the factors that should be taken into account when deciding whether to buy shares or purchase assets. When buying or selling a business, it is important to involve consultants at an early stage (including lawyers and accountants) to ensure that all circumstances are carefully considered and that the right buying/sale structure is chosen. In the case of an asset acquisition, the selling business is taxed on the consideration paid by the buyer. In order for shareholders to then withdraw the proceeds from the sale of the company, it is necessary to pay a dividend or make another form of distribution to their shareholders (which may result in another tax liability). While many buyers prefer to buy commercial assets over stocks, there are reasons that could motivate the purchase of shares, especially the brand and reputation of your company. Tax considerations such as available tax pools, including non-capital deferrals and investment tax credits, can also be seen as motivations. However, these considerations generally require that the same transaction or similar transaction be carried out with a good life expectancy to be claimed by the buyer after the acquisition.