Asset Sale vs. Share Sale -- Do you know the difference?

There is a lot of confusion when it comes to understanding the difference between an asset sale and a share sale in Canada so here is a brief explanation for those that do not know.

The overriding idea here is that sellers want to sell shares and buyers want to buy assets. There are a few reasons for this but most of them are tax related.

When the shares of a corporation are sold, everything from the company name to the liabilities are transferred including assets and the employees. Absolutely all parts of the organization are transferred between parties without exception.

Why is this better for the seller and worse for the buyer? One reason is because of unknown liabilities. It is possible for a corporation to be sold without the buyer’s knowledge of some future liabilities such as unfiled lawsuits or upcoming audits. Although the issue may be the fault of the previous shareholders, corporations are entities that are separate from owners and will be held accountable.

That being said, if the seller behaved fraudulently they may be held accountable however, there is no guarantee that you will be able to find them and settle accordingly.

Finally, one of the strongest reasons for a corporation’s owners to want to sell shares is because of the $750,000 per person Canadian Capital Gains Exemption on the sale of a qualifying small business shares.

If you have capital gains from the sale of shares, up to $750,000 of exemption is available for deduction against such gains. If you are unsure whether you qualify for this exemption check with your accountant and find out.

On the other hand, when the assets of a corporation are sold, all of the liabilities and tax filings remain with the corporation. In this case the buyer assumes no responsibility for the prior activities or filings of the corporation.

When assets are sold they are sold at current fair market value. This usually gives the new buyer a higher tax cost base for the assets to be written off over time compared to the depreciated value remaining on a corporation’s books after several years.

Finally, when you sell assets, the seller must swear under oath that all of the liabilities have been paid before the sale can go through.

These are only a few of the reasons that sellers want to sell shares and buyers want to buy assets but it should provide an understanding of some of the fundamental differences.