Personal and corporate income taxes are a critical component of every M&A transaction
Because of the complexity and advantages of the Canadian tax system for private companies, it is imperative that the purchaser of a private business consider personal/corporate income tax structuring and planning opportunities.
Traditionally, on the sale of a business there was a conflict between the vendor, who wished to shares, and the purchaser, who wished to purchase assets. This was the result of the different tax treatment afforded a sale of assets as compared with a sale of shares. A vendor of shares can often realize a significantly lower tax bill as a result of the $750,000 lifetime capital gains exemption. A major disadvantage to a purchaser of shares was that it inherited the historical tax cost of the assets of the target company instead of being able to write up the cost of the assets to reflect the market value purchase price being paid. However, given the prevalence of tax structures for entrepreneurs to maximize the lifetime capital gains exemption, in our experience, purchasers in many industries have generally come to expect that they will be acquiring shares.
Tax structures such as discretionary family trusts and holding companies are also available to the purchaser and should be considered in any acquisition involving private company purchasers. Such tax strategies serve to maximize the tax advantages of the acquisition for the purchaser on a post-acquisition basis.
In addition, other income tax issues must be considered, such as interest deductibility, loss carryforwards, so-called ‘safe income’ and the allocation of price amongst asset types. Transactions amongst related parties further complicate tax matters in that specific tax rules apply to such transactions.