Different methods for acquiring a business can impact purchase cost and tax benefits
Vancouver, BC -- (ReleaseWire) -- 10/15/2020 --With the reopening of the BC economy, business owners can finally pursue all the goals contemplated during the lockdown. For those wondering about the tax and legal considerations of acquiring a business, the Vancouver chartered professional accountants at Mew + Company have recently published an article on this subject. For more, go to https://www.mewco.ca/blog/tax-structure-when-buying-an-incorporated-business/
After a quiet and somewhat painful summer in BC, the economy is slowly chugging along. As business owners begin to put plans that were on-hold into action, it's advisable to consider the tax ramifications, particularly if plans include business acquisition.
For owners acquiring new businesses, there are two ways this is done: buying the shares of the company or buying the desired assets of the company.
A share purchase is simply when the buyer buys the shares of the corporation from the current shareholder. From a tax perspective, share purchase is relatively straightforward for both parties. The presale assets, liabilities, and all relevant tax values of the company are inherited by the new shareholder.
If the company continues in the same line of business, the non-capital losses carry forward and can be used to offset future operating gains under the new ownership. Due to the relative simplicity of a share purchase, professional fees could be lower. The downside of a share purchase is the legal responsibility for future tax reassessments, past environmental pollution, or any other non-tax legal claims also pass onto the new shareholder.
The most significant benefit of a share purchase transaction is for the vendor. The lifetime capital gains exemption of $ 866,912 can be used to reduce the taxable capital gain. Understanding this sizeable tax benefit to the vendor on a share purchase will impact the negotiated price.
The other way to acquire a business is to buy strategic assets, which could be almost all the assets of the business. This method requires that assets being acquired be valued based on the current negotiated price with any excess of the purchase price over the fair market value of tangible assets allocated to goodwill. Hence, the buyer gets to record the acquired assets at the price paid, getting the benefits of capital cost allowance on the higher "bumped up" asset values in the future.
For the vendor, the sale of assets creates more accounting and legal work. The sale of the assets is by the company, not the shareholder. Hence, the company reports the gains and losses. Then there is also personal tax consequence from the distribution of the company's retained earnings as dividends.
The bottom line is the sale of assets is not the preferred choice for the vendor, so the buyer should expect to pay more.
As a firm of chartered professional accountants in Vancouver, the team at Mew + Company can assist in many purchase negotiations. Besides quantifying tax savings, an advisor can perform the required due diligence, providing the purchaser with greater security and peace of mind. More importantly, an accountant can advise on how to allocate the purchase for optimal business tax planning.
Anyone looking for personal or corporate tax planning services is encouraged to contact Mew & Company Professional Chartered Accountants in Vancouver at 604-688-9198.
About Mew + Company Chartered Professional Accountants
Mew + Company Vancouver, is an ideal solution to the taxation problem. With a simple philosophy of building long-lasting customer relationships, the company has been serving corporate clients in a variety of fields—including restaurants, real estate, retail, and the service industry. Investing in their specialist services will undoubtedly be fruitful for all kinds of clients.
To learn more about Mew + Company and discuss their services, log on to https://mewco.ca/
Lilly Woo, CPA, CA, CFE, CFP
Mew + Company Chartered Professional Accountants
604 688 9198
Company Website: https://www.mewco.ca