Business Acquisitions and Divestitures

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Business Acquisitions and Divestitures

• B 7610

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The Choice

• You generally have 2 choices- buy/sell assets or
  buy/sell shares.
• The choice depends on a number of factors
  including
• tax status of shareholders of the vendor corp,
  the tax status of the vendor corp itself the
  tax status of the purchaser.

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• The type of income that will be generated from
  the sale of the assets themselves if assets are
  sold.
• The amount of the cost base the vendor has in the
  shares of the co and the amt of the cost base of
  the assets themselves.
• Tax rates applicable to vendor and purchaser
• existence of losses within the vendor Corp to
  shelter income and tax.
• Availability of capital gains exemption

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SALE OF ASSETS _ VENDOR

• Creates taxable income or losses to vendor Corp
• The after tax proceeds are in the co and must be
  distributed- this costs money

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SALE OF ASSETS _ PURCHASER

• Obtains tax base of assets FMV
• Provides future tax savings through CCA.
• The future tax deductions will be higher than
  they were for the vendor. Greater reduction in
  tax due to increase in amount allowed to be w/o
  through CCA.

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SALE OF SHARES _ VENDOR

• Sells a single asset- the shares
• results in a capital gain or loss leaving after
  tax proceeds for re-investment in the
  shareholders hands.

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SALE OF SHARES _ PURCHASER

• Assumes the tax status of the vendor re w/o of
  assets of the company. Remember that nothing
  happens on the co books.
• Future tax savings from CCA are the same as if
  the vendor had retained the shares.

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Some observations

• The vendor will normally accept less for shares
  than assets. This is especially true if the share
  sale is subject to the availability of the
  capital gains exemption.
• The purchaser will normally be willing to pay
  more for assets due to the increase in future tax
  deductions.

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Small Business Capital Gains Exemption

• Available only on the sale of shares
• Is not available on the sale of assets
• Only available on QSBC shares
• Hard to meet the test at determination time
• Big advantage to qualifying- 500,000 tax free.

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Collecting Information

• The purchaser should ask for
• 5 yr. reconciliation of accounting income to
  taxable income
• description of effective tax rate
• small business capital gains exemption
  availability
• status of capital dividend a/c (discuss)
• availability of loss c/f

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• Comparison of book value of assets to tax values.
• Availability of CCA
• HST position
• List of shareholders of target co and marginal
  rates
• Tax advantages of assets Vs shares

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Acquisition of control

• When shares are sold, and there is an acquisition
  of control by someone not related to the vendor,
  the co is deemed to have an immediate y/e
  immediately before the acquisition of control and
  must file tax returns for the period to the date
  of acquisition of control.
• Watch loss carryovers..this is counted as a year

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• The purchaser can now choose a new y/e.

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Holding co used to acquire a company

• Mr.. X wants to buy 100 of the shares of Y co
  for 1,000,000. If he borrows the money
  personally, the bank would have security in the
  form of Y co/s shares but not in the form of the
  Companys assets. To repay both the interest and
  principal, Mr.. X will have to withdraw money
  form the Co. These dividends or salary will be
  taxed at his marginal rate.

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• As an alternative, Mr. X could form X Co and X.
  Co. could borrow from the bank to acquire Y Cos
  shares.

X Co.
Dividends may flow tax free if X Co owns gt 10 of
votes and value of Y Co.
100
Y. Co
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• So now X Co is repaying the loan and paying the
  interest. Unless X Co has income, they will not
  be able to absorb the int exp. deduction.
  Therefore you can amalgamate or windup Y Co. into
  X. Co and the debt and the int expense are now in
  the operating co.

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• Another reason to use a holding co is to
  creditor-proof.

Hold Co- owns real estate
Business operations
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Potential Liability after Share Acquisition

• Buyer assumes the tax position of the vendor.
• Always the possibility that purchaser will
  dispose of some assets after and incur taxable
  income.