You may be thinking of buying or selling a business and you are hesitating between a sale of shares and a sale of assets? Here are 3 elements to consider before making your choice:
1.Capital Gains Exemption
The sale of shares usually triggers capital gains for the seller, and half of such capital gains is considered as taxable income. When the target corporation meets certain criteria determined by tax authorities, the seller is eligible to claim a lifetime capital gains exemption(“CGE”), meaning the vendor could possibly avoid any taxation on the capital gains, depending on the amount of such capital gains. The lifetime capital gains exemption as of 2024 will be set at $1,016,038.
The CGE doesn’t apply in the context of a sale of assets, sale taxes and possibly land transfer taxes may be applicable to the sale of assets.
Consequently, vendors generally prefer a sale of shares to a sale of assets.
2.Liability
In a sale of shares, the purchaser generally becomes responsible, after the transaction, for all the liabilities of the business, including lawsuits, tax reassessments, or any other tax or legal liabilities with respect to the business. For this reason, it is important for the purchaser to conduct a thorough due diligence review of the business before concluding a purchase of shares to avoid any bad surprises after the transaction.
In a sale of assets, the purchaser generally does not take on the liabilities of the corporation, since he is only purchasing its assets. Moreover, the purchaser gets to pick and choose the assets that he wishes to purchase, contrary to a share purchase where the purchaser is de facto buying all the assets of the corporation.
Consequently, the buyer usually prefers a sale of assets to a purchase of shares, subject to specific factors who could favor a sale of shares rather than a sale of assets.
3.Formalities
Share purchase transactions usually require more time to complete and close compared to asset purchase transactions, for many reasons including the due diligence review of the target corporation and the accrued corporate formalities required for a sale of shares.
Conclusion
The choice between a sale of shares or a sale of assets requires careful consideration of the elements above which could have a significant impact on the transaction and the parties to such transaction. Our team can help you determine which option would be right for you. Please contact us for more information!
Information provided in this article is intended as general introductory information only. The information provided in this article is not legal advice. It should not be construed as legal advice and should not be relied upon as such. Should you want legal advice regarding the information provided in this article, please contact one of our lawyers.
