How can I reorganize before closing to carve out assets I am keeping?

Owners who want to keep something, such as the building or a side business, have to separate it from the company before the buyer takes over. The law gives a few ways to do that, and each one carries tests that must be met before closing. What follows describes the tools in the statutes, not a recommendation about which to use.

Moving assets into a separate company

Income Tax Act s.85 lets a taxpayer and a taxable Canadian corporation jointly elect an agreed amount when eligible property is disposed of to the corporation for consideration that includes shares of its capital stock. The election is made in prescribed form, such as CRA’s T2057. The agreed amount is overridden by limits in s.85(1), including a cap at fair market value, and the rollover is not automatic.

Paying assets out of the company

Under the Canada Business Corporations Act (CBCA), s.43(1), a corporation may pay a dividend in money or property, subject to s.42. Section 42 bars declaring or paying a dividend if there are reasonable grounds for believing the corporation is, or would after the payment be, unable to pay its liabilities as they become due, or that the realizable value of its assets would thereby fall below its liabilities and stated capital. A benefit conferred on a shareholder is generally included in the shareholder’s income under Income Tax Act s.15(1), subject to the exceptions listed there, including payment of a dividend.

Selling fewer assets instead

A buyer can instead acquire chosen assets and leave the rest. Under CBCA s.189(3), a sale of all or substantially all of a corporation’s property outside the ordinary course needs shareholder approval in accordance with s.189(4) to (8), and s.190(1), subject to ss.191 and 241, lets a holder of shares of any class dissent from that resolution.

Limits that follow the transfer

Under Income Tax Act s.69(1)(b), a taxpayer who disposes of anything to a person not at arm’s length for no proceeds or for proceeds less than fair market value is deemed to have received proceeds equal to that fair market value, except as expressly otherwise provided in the Act. Under Bankruptcy and Insolvency Act s.96, on application by the trustee, a court may declare a transfer at undervalue void as against the trustee, or order payment of the difference in value. For a non-arm’s-length party, the look-back reaches one year before the initial bankruptcy event, with a further window back to five years if the debtor was insolvent or intended to defraud, defeat or delay a creditor. Related pages: the cost of carving out the building and what if a carve-out leaves the company unable to pay its debts.