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  • Chart-Sol-Bus Law-Purchase and Sale of A Business Tax (UPDATED 2018)

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    This document summarizes considerations for allocating the purchase price between a vendor and purchaser of a business. It also outlines eligibility criteria for making a section 85 election to rollover the tax liability of asset sales between a vendor and purchasing corporation. The vendor prefers to allocate more of the purchase price to non-depreciable assets like land to minimize tax, while the purchaser prefers depreciable assets to maximize future tax deductions. For inventory, buildings, land, machinery and other assets, the document outlines the tax implications for both the vendor and purchaser. To make a section 85 election, the transfer must involve eligible capital property, the transferor must receive shares, and both parties must jointly file the

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    Chart-Sol-Bus Law-Purchase and Sale of a Business Tax (UPDATED 2018)

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    This document summarizes considerations for allocating the purchase price between a vendor and purchaser of a business. It also outlines eligibility criteria for making a section 85 election to rollover the tax liability of asset sales between a vendor and purchasing corporation. The vendor prefers to allocate more of the purchase price to non-depreciable assets like land to minimize tax, while the purchaser prefers depreciable assets to maximize future tax deductions. For inventory, buildings, land, machinery and other assets, the document outlines the tax implications for both the vendor and purchaser. To make a section 85 election, the transfer must involve eligible capital property, the transferor must receive shares, and both parties must jointly file the

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    2 views1 page

    Chart-Sol-Bus Law-Purchase and Sale of A Business Tax (UPDATED 2018)

    Uploaded by

    athan
    This document summarizes considerations for allocating the purchase price between a vendor and purchaser of a business. It also outlines eligibility criteria for making a section 85 election to rollover the tax liability of asset sales between a vendor and purchasing corporation. The vendor prefers to allocate more of the purchase price to non-depreciable assets like land to minimize tax, while the purchaser prefers depreciable assets to maximize future tax deductions. For inventory, buildings, land, machinery and other assets, the document outlines the tax implications for both the vendor and purchaser. To make a section 85 election, the transfer must involve eligible capital property, the transferor must receive shares, and both parties must jointly file the

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    of 1

    TAX NOTES

    Purchase and Sale of a Business

    Asset Purchase Considerations - Allocating the Purchase Price: (p.406-410)


    Note: Vendor will try to minimize tax liability in the year or sale, purchaser will try to minimize tax liability in subsequent
    years

    Vendor’s Preference (order) Purchaser’s Preference (order)


    1. Non depreciable capital property (land) 1. Inventory
    2. Depreciable capital property → little or no 2. Depreciable capital property (classes that
    recapture of CCA have a higher rate of CCA)
    3. Eligible capital property 3. Depreciable capital property (classes that
    have a lower rate of CCA
    4. Depreciable capital property 4. Non depreciable capital property (land)
    5. Inventory and other assets that will give
    rise to a full income inclusion

    Inventories
    ● Usually sold at book value and ITA consequences are minimal
    ● Vendor: Gain or loss is on income account, not capital account
    ● Purchaser: Cost of inventory is deductible
    Building
    ● Vendor: Include CCA recapture in income. Recapture = difference between building’s UCC and the lesser of
    (i) the portion of the purchase price allocated to building, or (ii) the capital cost of the building.
    ● Vendor: If sale price > capital cost = capital gain; If capital cost < UCC = terminal loss
    Land
    ● Vendor: Capital gain or loss  sale price – ACB
    ● Vendor: ½ of capital gain is taxable; ½ of capital loss is deductible
    Machinery and Other Depreciable Property
    ● Recaptured CCA (ordinary income) = original cost – UCC
    ● Capital Gain = purchase price (FMV) – original cost

    Asset Purchases from Shareholders: Section 85 Election (214R-216R)


    1. Eligibility Criteria
    a. Parties
    i. Transferor = any taxpayer qualifies (includes persons, corps and trusts)
    ● s. 85(2) permits a partnership to transfer
    ii. Transferee = Corporation incorporated in Canada or corporation resident in Canada
    b. Which assets qualify?
    i. Any capital property (depreciable and non-depreciable, excluding real property except as per (v))
    ii. Canadian and foreign resource properties
    iii. Inventory (except real property that is inventory, an interest or an option in respect of real
    property)
    iv. Goodwill and intangible property (until December 31, 2016)
    v. Real property (owned by a non-resident that is used in a business carried on by the non-resident)
    c. Share Consideration
    i. Transferor must receive at least one share in capital stock of purchasing corporation
    ii. Can also receive non-share consideration (e.g. cash, promisory note, mortgage, etc.), but this
    cannot exceed “tax cost” of transferred asset
    2. Claiming the Rollover
    a. Transferor and transferee must jointly execute and file the prescribed election form.
    b. Must specify an elected amount. Generally equal to vendor’s cost amount
    c. The earliest of the days on or before which the transferor and transferee corporation is required to file
    taxes
    Note: corp tax return must be filed within 6 months of year end (s.150(1)(a))

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