Selling your business in Quebec: shares or assets?

Both scenarios can lead to the sale of the same business, but their tax consequences are very different.

Sell ​​the company's shares

In a share sale, the buyer becomes the owner of the company itself. The buildings, equipment, contracts, cash and other assets therefore remain within the company.

For the seller, this structure can be advantageous since the gain realized on the shares may, in certain circumstances, be eligible for the capital gains deduction applicable to qualified small business corporation shares.

However, please note: this process is not automatic. Several criteria must be met, particularly regarding the nature of the assets held by the company and their use prior to the transaction.

A company that has been accumulating investments or cash for several years that are not needed for its activities might therefore benefit from analyzing its structure well before receiving a purchase offer.

This is often where pre-sale tax planning becomes crucial.

Sell ​​the company's assets

In an asset sale, it is not the company that changes ownership. Rather, the company sells some or all of its assets to the buyer: equipment, inventory, buildings, customer base, intellectual property, goodwill, etc.

The sale price must then be allocated among the various assets involved. This allocation is important because they do not necessarily all receive the same tax treatment.

The Canada Revenue Agency specifies, in particular, that the amounts allocated to assets must be reasonable and take into account their fair market value.

For the buyer, purchasing assets can be advantageous since they acquire these assets at new tax values. Conversely, when buying shares in a company, the tax cost of the assets already held by that company generally remains unchanged.

This is one of the reasons why the buyer and the seller do not always favour the same structure.

And what about the GST and QST?

In Quebec, a sale of assets can also raise questions regarding GST and QST.

However, there is an option that, when certain conditions are met, does not allow for the application of GST/HST and QST to the sale of a business or part of a business.

One of the main conditions is that the buyer acquires 90% or more of the assets reasonably necessary for the operation of the business**. The seller and the buyer must then make the joint election provided for this purpose.

In other words, one should not simply assume that taxes will apply (or will not apply) to the transaction.

Why the selling price doesn't tell the whole story

Suppose one buyer offers $2 million for your company's shares and another offers slightly more for its assets.

The second offer is not necessarily the most advantageous.

Depending on the chosen structure, tax may be paid at different levels, and the amounts may have to be withdrawn from the company. Therefore, what truly matters to the seller is the net profit after tax, not just the amount stated in the purchase offer.

That is why the tax structure should ideally be part of the negotiations from the very beginning of the transaction.

Prepare for the sale before having a buyer

The best tax planning is rarely that done a few days before signing at the notary's office.

If you are considering selling your business in the coming years, it may be worthwhile to analyze now the composition of the company's assets, the shareholding structure and the tax implications of a potential transaction.

A well-prepared company generally offers more options when it comes time to negotiate.

This article presents general information. A business transaction should be subject to a tax analysis tailored to its specific circumstances.