1. Chapter Objectives Be able to: n Explain the differences in tax implications between asset sales and share sales. n Explain the implications to the vendor for asset sales and share sales. n Explain the implications to the purchaser for asset sales and share sales. n Apply the concepts to business acquisitions and divestitures including the use of the worst-case scenario approach. n Explain the relationship between the asset price and share price. n Explain the factors to consider before making the final decision to purchase.

2. Asset Sales versus Share Sales n In an asset sale, the after-tax proceeds would be in the selling corporation’s assets and taxed a second time when distributed to shareholders. The disposal of the assets would generate business income and/or capital gains for inclusion in the selling corporation’s income. n In a share sale, the after-tax proceeds would be in the shareholder’s assets and not taxed again. The disposal of the shares would generate capital gains for inclusion in the shareholder’s income.

3. Implications for the Vendor n In the sale of assets, factors to consider are: the type of income from the asset dispositions (business income or capital gain, etc.); nature of corporation (public or private); availability of small business deduction in CCPC; and deferral of proceeds (reserve for capital gain). n In the sale of shares, factors to consider are: availability of capital gain deduction.

4. Implications for the Purchaser n In the sale of assets, factors to consider are: allocation of the purchase price and future CCA and amortization. n In the sale of shares, factors to consider are: the inability to use fair market value for the corporation’s assets in computing CCA and amortization and the future tax liability for when the corporation’s assets are sold. n In either case, the post-acquisition corporate structure also needs to be considered.

5. Relationship between Asset Price and Share Price n Given the various factors that the vendor and purchaser need to consider, prices for the sale of the business will vary significantly. n If the assets are sold, the vendor must estimate the impact of taxes when the proceeds are distributed to the shareholder/vendor. n If the shares are sold, the purchaser must estimate the impact of taxes for the potential disposal of the business’s assets. n Thus, the negotiated price of the business will include a risk for these unknown tax impacts. This risk can be diminished if both parties take into consideration the worst-case scenario. The worst-case scenario for the vendor would be the asset sale along with the wind-up of the corporation and distribution of all of its earnings. The worst-case scenario for the purchaser would be the share sale along with the immediate sale of all assets of the acquired corporation.

6. The Decision to Purchase n The value of a business to a purchaser is directly related to the after-tax profits that the acquired business will generate. The three major tax issues that the purchaser must examine are: future rates of tax; impact on cash flow; and potential tax liability after share acquisition. n Tax rates vary from person to person and anticipating future rates is important. n After-tax cash flows are the return on this investment and they must be acceptable in comparison to the purchase price. n In a share purchase, the purchaser is assuming the tax position of the vendor corporation where there may be some unrealized gains. If the gains are realized, there may be an unexpected tax liability.