CHAPTER 19:

Business Acquisitions and

DivestituresTax-Deferred
Sales

Prepared by

Kristie Dewald
University of Alberta
Electronic Presentations in Microsoft PowerPoint

Copyright 2016 McGraw-Hill Education Limited

Business Acquisitions and Divestitures

Tax-Deferred Sales
I.
II.

Tax-Deferred Sales and Acquisitions

Sale of a Closely Held Corporation

I.

Tax-Deferred Sales and Acquisitions

A. The Nature of and Reasons for a Tax-Deferred Sale

Distinguished from a taxable sale by the nature of the

payment received for the property:
A taxable sale involves the payment of cash, or a deferred
payment of cash secured by notes bearing interest.
A tax-deferred sale involves payment in the form of shares
issued by the purchasing corporation.

A. The Nature of and Reasons for a Tax-Deferred Sale

Reasons to accept a greater risk by receiving

shares rather than cash or other secure assets:
1. Want to participate in the future growth of the business.
2. Want to enhance its after-tax return on investment.
3. Purchaser may not have sufficient cash to make the
acquisition, or perhaps no other acceptable buyers are
present.

A. The Nature of and Reasons for a Tax-Deferred Sale

Alternative courses of action are available:
1. A sale of assets at an elected transfer price equal to the
assets tax values.
2. A sale of the shares at an elected transfer price equal to the
tax value of the shares.
3. An amalgamation of two or more corporations.
4. A reorganization of share capital.

B. Sale of Assets
Tax deferred if sell price = tax costs
Can be done even though the actual selling price for legal
purposes is equal to the assets FMV.
Sell at FMV for legal purposes; at tax values for tax
purposes
Vendor can be paid in cash or notes to a maximum of cost
(the elected amount)
Balance is in form of shares

Corporate Structure - Prior to acquisition

Shareholder X

Shareholder Y
ACB shares
FMV of shares
ACB assets
FMV assets

Buyer
Corporation

Seller
Corporation

$ 100,000
$ 500,000
$ 400,000
$ 700,000

Corporate Structure
after acquisition of assets
From example situation above sale of assets
Shareholder X

Shareholder Y

Sell asset - $700,000

Elect at
$400,000

Buyer
Corporation

Seller
Corporation
Debt and/or Cash $400,000
Shares $300,000
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B. Sale of Assets
The vendor achieves a tax deferral and the potential for
increased returns,
but also assumes an additional risk by accepting shares of the
purchaser corporation as payment.

Advantage is that the purchase can be achieved with a

minimum of cash and debt,
because of the requirement that shares be issued as part of the
payment terms.

Disadvantage to the purchaser is:

Cost base of the assets = transfer price elected.

C. Sale of Shares
Sale of shares - can obtain a tax deferral by using the
same elective provisions as for an asset sale.
Similar advantages and disadvantages as a tax-deferred
sale of assets.

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C. Sale of Shares
Tax Deferred Sale of Shares
Shareholder X

Share FMV $400,000

Tax costs nil

Shareholder Y

Buyer
Corporation
Cash or debt $100,000

Seller
Corporation

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C. Sale of Shares
Must formalize their intentions by signing a tax
agreement.
May be difficult when there are many shareholders, and
virtually impossible when selling a public corporation.
Share-for-share exchange would solve this problem

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C. Sale of Shares
Share-for-share exchange
A share-for-share exchange purchase a corporation by
paying entirely with shares.
Each separate vendor (shareholder) is entitled to declare
that its shares have been sold at their cost amount deferring tax.

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C. Sale of Shares
Share-for-share exchange
Not so attractive for the purchaser:
ACB of the shares acquired = lesser of the shares paid-up
capital or their FMV.
PUC normally lower than FMV, result is
ACB is lower than the FMV of the shares.

May result in additional taxes if the shares are

subsequently sold.

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D. Amalgamation
X Co
Shareholders

X Co
Shareholders

Amalgamated
XY Co

X Co

Combines a share sale with an

asset sale,
Shareholder of former
corporations exchange their
shares for shares of the new
corporation, and
all of the former corporations
transfer their assets to the new
corporation.

Y Co
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E. Share Reorganization
A tax-deferred sale through a reorganization of share
capital.
Current
Shareholders
Pref. Shares
FMV $500,000
ACB $100,000

New
Shareholders
Common Shares
FMV $500,000
ACB $100,000

Common Shares
FMV nominal
ACB - nominal

Operating Co

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F. Conclusion
All tax-deferred acquisitions have similar results for
both vendor and purchaser.
Vendor defers tax on the sale by accepting payment, in the
form shares;
that vendor incurs greater risk.

Purchaser assumes the disadvantage of a lower cost base;

But reduces cash or debt requirements of acquisition by using shares.

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F. Conclusion
Considerable flexibility in structuring a business
divestiture and acquisition.
The choice of method will depend on the needs of the
vendor and purchaser.
The decision-making process must involve examining
each of the alternatives in terms of both its immediate
and its long-term impact.

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II. Sale of a Closely Held Corporation

A. Distinguishing Features:
Often a closely held corporation will have the following
features which affect the sale:
1. The corporation has a number of investment assets that
are not related to the operation of the business.
2. Pressure to sell the business to immediate family
members of the next generation, or to long-term senior
managers or other employees.
Tend not to have cash necessary for the acquisition

3. The business of a closely help corporation is often sold in

response to the owners wish to retire.
Vendor needs future income from investment of sale proceeds.
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B. Sale to Third Parties

May involve negotiations with a number of potential
buyers:
each of which faces a different financial situation, and
each of which has a different reason for making the acquisition.

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C. Sale to Family Members

The sale and purchase of a business within a family unit
has all of the fundamental aspects of a sale to third
parties.
In most cases, the vendor in a family transaction is
prepared to give preferential terms that will ensure a
successful acquisition by the purchaser.

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C. Sale to Family Members

A parent may want to sell a family business to

children well before an estate transfer because:
1. Early transfer may minimize the tax liability that would
otherwise occur on the death.
2. The early transfer of a family business from one
generation to another provides an orderly succession and
a continuity of management responsibility.

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C. Sale to Family Members

Often motivated by personal factors, which in turn
influence the form of the transaction.
A sale to a third party must result in the best possible
security for the vendor.
Sale to children - vendor is less concerned about
security;
means that the deferral and minimization of tax may be the
primary concern in choosing a method.

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