What taxes does a buyer pay when buying a business?

Most tax discussion in a business sale focuses on the seller, because the seller has the gain. Buyers have their own bill, and some of it is easy to miss until the closing statement lands. The exposures differ substantially between an asset purchase and a share purchase, which is one more reason structure gets decided early.

Sales tax on an asset purchase

An asset sale is generally a taxable supply, so GST/HST can apply to the assets transferred. Where the seller supplies substantially all of the property needed to carry on a business and both parties are registrants, a joint election is available that can relieve the tax on the transfer — commonly referred to by the electing provision. The election has conditions and must be filed properly, and it does not cover every asset. Quebec administers QST separately, and provinces with retail sales tax have their own rules on equipment transfers. A share purchase generally does not attract GST/HST on the shares themselves.

Land transfer tax and property costs

• Land transfer tax is provincial and applies where real property changes hands; Toronto adds a municipal layer.
• A share purchase generally avoids land transfer tax because the property does not change registered owner, though anti-avoidance rules exist in some provinces.
• Property tax reassessment and, in some provinces, adjustments for prepaid amounts get settled on closing.
• Registration fees and mortgage-related charges apply where new financing is registered.

Inherited liability in a share purchase

When you buy shares, you buy the company as it stands, including its tax history. Unassessed income tax, unremitted payroll source deductions, unfiled GST/HST returns and disputed assessments all come with it, and directors can face personal liability for certain unremitted amounts. This is why share deals get heavier tax diligence, why buyers ask for CRA compliance certificates and clearance-type confirmations where available, and why indemnities and holdbacks are negotiated hard.

Ongoing tax positions the buyer inherits or resets

Structure also sets the buyer’s future deductions. In an asset purchase, the buyer generally takes the assets at the allocated purchase price, giving a fresh depreciation base. In a share purchase, the company’s existing balances carry over, which can mean lower future deductions than the price paid would suggest. Loss carryforwards inside a target may be restricted after an acquisition of control. Interest deductibility depends on how the purchase is financed and at which level of the corporate structure.