Chapter Objectives

1
Chapter Objectives

• Be able to
• Explain the rationale for tax deferred sales.
• Explain the available alternatives, including the
  unique characteristics of each, for tax-deferred
  sales.
• Apply each of the alternative to the sale of
  closely-held corporations.

2
Tax-Deferred Sales and Acquisitions

• In order for the vendor to achieve a continued
  tax deferral on the sale of a business, it must
  be prepared to maintain a continuing equity
  interest in the purchasers corporation or the
  vendor corporation. A vendor who receives shares
  as part of the sale transaction incurs continued
  risk but also the opportunity for continued
  growth in value.
• The nature of the payment received for the
  property distinguishes a tax-deferred sale from a
  taxable sale. A tax-deferred sale involves
  payment in the form of shares issued by the
  purchasing corporation. Whereas, a taxable sale
  involves the payment of cash or the deferred
  payment of cash secured by interest-bearing
  notes.
• The three reasons why a vendor may be prepared to
  accept shares for payment are the vendor wants
  to participate in the continued growth of the
  business, the vendor wants to enhance after-tax
  return on investment, and the purchaser may not
  have sufficient cash.

3
Tax-Deferred Sales and Acquisitions (continued)

• The four alternative courses of action available
  when arranging a tax-deferred sale are sale of
  assets at an elected price equal to the assets
  tax value sale of shares at an elected price
  equal to the shares tax value corporate
  amalgamation and share capital reorganization.
• When assets are sold using the tax cost as the
  elected price, a purchaser must weigh the impact
  of reduced funding requirements against the
  impact of new dividend requirements and reduced
  CCA.
• When shares are sold using the tax cost as the
  elected price, the concerns are the generally the
  same as for assets sold, except to utilize the
  election, the purchaser and the vendor must
  formalize their intentions by signing a tax
  agreement. A solution to this problem is using a
  less formal tax-deferred method of selling
  shares, referred to as a share-for-share exchange.

4
Tax-Deferred Sales and Acquisitions (continued)

• In an amalgamation, shareholders of the former
  corporations exchange their shares for shares of
  the new corporation and all of the assets of the
  former corporations are transferred to the new
  corporation. As a result, the amalgamation
  process combines a share sale with an asset sale
  and in a tax-deferred exchange of shares and
  assets.
• Share-for-share exchanges and amalgamations are
  most common amongst public corporations since the
  new shareholders will have the flexibility of
  selling their new shares in the open market or
  holding them for future returns.
• Share reorganizations are more risky since the
  shares received are for the vendor corporation
  which is more risky than receiving shares of the
  purchaser corporation. This method is appropriate
  when the seller has significant confidence in the
  purchasers ability to manage the acquired
  business.

5
Sale of a Closely Held Corporation

• The closely held corporation is a corporation
  with a small number of shareholders and there is
  typically a close financial relationship between
  the corporation and its shareholders.
  Consequently, there are typically special
  circumstances to address in any sale of the
  business.
• Some special features that may arise are the
  corporations assets may include investment
  (non-active) assets potential purchasers, like
  other family members or employees, may not have
  adequate cash to purchase the business and the
  primary shareholders reason for selling is
  his/her intention to retire.