Week 7 - Asset Sales and Wind Up

asset sale

when corporation sells its business assets to a purchaser

inventory

business income/loss

accounts receivable

capital income/loss or business income/loss if s.22 election

land

capital gain/loss

depreciable asset

capital gain, recapture, terminal loss

goodwill

capital gain, recapture, terminal loss

when recapture and capital gain

proceeds > ACB

when recapture only

proceeds > UCC, proceeds < ACB

terminal loss

proceeds < UCC

s.22 election eligibility

all or substantially all of property used in business is sold, purchaser intends to continue the business, vendor/purchaser joint election

with s.22 election

vendor business income/loss treatment, purchaser claims eligible bad debt reserves and deductions

s.167 election eligibility

vendor transfers business/part of business, purchaser acquires all or substantially all of property necessary to carry on business, registration match, joint election

s.167 form

GST44

wind up

when corporation distributes its remaining assets to individual shareholders, cancels its shares and legally dissolves

wind up steps

tax consequences of asset disposition, funds available for distribution, deemed dividend, capital gain/loss on cancelled shares

wind up pros

immediate personal access cash, eliminates corporate admin costs, can use RRSP/TFSA

wind up cons

immediate dividend tax may be significant, corp ceases to exist

retain pros

can defer personal tax on distributions, can distribute taxable dividends gradually, dividend payments timed for lower marginal rate, corp remains available for future

retain cons

ongoing filing and admin costs

asset sale seller

corporation pays tax on asset gains, shareholder pays dividend tax

asset sale purchaser

receives asset with new tax cost and avoids acquiring corporate entity

share sale seller

shareholder pays capital gains tax directly, possible CGE

share sale purcasher

acquires corp with its existing asset tax costs and liabilities

vendor prefers which sale

share sale

reasons for vendor preferring share sale

capital gains exemption, avoids double taxation, tax efficient treatment

purchasher prefers which sale

asset sale

reasons for purchaser preferring asset sale

higher tax cost of assets, avoid hidden liabilities, avoid inherent tax liabilities

vendor minimum share price formula

after tax cash = CDA + P - t[0.5x(P-ACG) - CGD]

purchaser maximum share price formula

asset price - PV of CCA tax shield = share price + liabilities assumed + PV of tax on inherent gains - PV of CCA tax shield

negotiated share sale

vendor minimum < purchaser maximum