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	Sale of a business - Should I sell the assets or my shares? Recently, the editor of Private Practice Division News mentioned to me that the "buying and selling of a business" would make a good topic for my column. She felt it was something that would interest physiotherapists. Since they're the group that this publication is directed towards, why not. However, this topic is very complicated and I'm only going to briefly touch on the highlights here. I would HIGHLY recommend you consult a tax professional to assist you in the selling of your business. As you've heard me say many times before, there are two different worlds involved with all matters of taxation: the incorporated world and the unincorporated world. This applies to the buying and selling of a business as well. Selling an unincorporated business is definitely less complex. Basically, if you're buying an unincorporated business, you're buying the assets of the business. These may or may not include "Goodwill". Goodwill is a company's reputation, it's good name, it's client base, etc. Goodwill is often very hard to quantify, and even harder to get somebody to buy. It's only ever realized when a business is sold. Whatever amount one party is willing to pay another party to buy their business, above and beyond the fair market value of the assets being purchased, is deemed to be goodwill. Revenue Canada (now known as Canada Revenue Agency or CRA) treats this excess payment, or "goodwill", as an asset of the buyer. This asset is known as an "eligible capital expenditure" (ECE) and 75% of this expenditure can be amortized on the buyer's tax return at a rate of 7% per year, of the declining balance. The seller must then claim the proceeds they receive for goodwill as income ("recaptured" amortization written off in prior years) and/or as a capital gain. These are the main issues that face the buyer and seller of an unincorporated business. The buying and selling of an incorporated business can be done in two possible ways. 1) Sell the shares of the business, which gives the buyer control over the net assets of the corporation. This resulting in either a capital gain or loss to the seller. 2) Sell the assets of the corporation. The proceeds of the sale of the assets would stay within the corporation after the sale. The shareholders would then pay out the cash as dividends and wind up the company. Selling the assets will create what's known as a "capital dividend account" within the corporation. This basically is the NON-TAXABLE part of the capital gain, (1/2 of the gain) on the sale of each asset, accumulated into this "virtual" account balance (no real money is involved) known as the capital dividend account. The account balance can then be paid out as a tax-free dividend from the corporation to its shareholders. Example: Mr. X & X. Co., Mr. X owns all the shares of X Co. Ltd., a Canadian-controlled private corporation. Mr. X has an offer on the table from a Canadian public company to buy either all the shares of X Co. for $100,000 OR all the assets of X Co. for $146,000. Assume Mr. X's shares have a cost base of $1000 (paid-up capital) and are eligible for the $750,000 enhanced capital gains deduction on the sale of qualified small business corp. shares. Thus, no tax for Mr. X. on sale of X. Co. shares. Mr. X. is in the 48.25% marginal tax bracket. X Co. has the following assets: ASSET   PROCEEDS   COST BASE   Cash   $44,000   $44,000   Land   $10,000   $ 1,000   Buildings   $35,000   $10,000   Equipment   $25,000   $18,000   Goodwill   $32,000         NIL           $146,000   $73,000   Option 1 - Sell shares for $100,000 Proceeds   $100,000 Cost base of shares   $    1,000 Capital Gain   $   99,000 Enhanced Capital Gains deduction   $( 99,000) Net proceeds from sale of shares            $100,000   Option 2 - Sell all the assets for $146,000, and wind up the corporation ASSET  PROCEEDS COST BASE NET CAP GAIN (1/2) CAP DIV ACCT (1/2) Cash $ 44,000 $ 44,000 --- --- Land $10,000 $ 1,000 $ 4,500 $4,500 Buildings $35,000 $10,000 $12,500 $12,500 Equipment  $25,000 $18,000 $3,500 $3,500 Goodwill  $32,000 NIL $16,000 $16,000   $146,000 $73,000 $36,500 $36,500   Calculation of deemed taxable dividend paid to Mr. X. on winding-up of X Co. after sale of assests Funds available for distribution                                            $146,000 Less: Corporate taxes on net cap gain from sale of assets ($36,500 x 35,73%) $13,041   Less: paid-up capital of shares           $1,000   Deemed dividend on winding-up       $131,959   Less: tax-free capital dividend account         $36,500   Net dividend for tax purposes       $95,459   Net cash retained by Mr. X after sale of assets and wind-up: Funds distributed on wind-up ($146,000 less corp. taxes)          $132,959 Less: tax on deemed dividend:         Dividend   $      95,459       Gross-up (1/4 x $95,459)   $      23,865       Taxable dividend   $    119,324           Tax on dividend @ 48.25%   $      57,872       Less: dividend tax credit   $     15,910                  (41, 664)   Net cash retained by Mr. X. on sale of assets and wind-up of X Co.                                   $91,295 Therefore, Mr. X. should sell the shares of X. Co. rather than the assets.
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