Why do buyers prefer asset purchases for tax reasons?

Buyers like asset purchases for three tax reasons: a new cost for each asset, a tax history that stays with the seller, and the freedom to buy only what they want. Each has a price, because the seller’s tax position usually points the other way. Where the two meet is a negotiation, which is why structure and price are settled together.

A new cost for what you buy

In an asset purchase the buyer’s cost for each asset is its share of the price, and that cost supports depreciation deductions in later years. The tax cost bump covers the mechanics. In a share purchase the corporation keeps its old cost, which is the point made in why a share purchase gives no step-up.

A tax history that stays behind

The seller’s corporation keeps its own CRA accounts and filings. The CRA says a registrant that closes a GST/HST account files a final return and remits what it owes, and a corporation must still file a T2 return for every tax year. A buyer using its own entity begins with its own accounts instead of taking on a company’s accumulated payroll and HST history.

What the buyer gives up

Asset purchases carry costs of their own. Sales tax can apply to the price unless the going-concern election is available, and the CRA says that election cannot be used when only individual assets are sold. The seller may face recapture on depreciated assets, and the CRA ties the capital gains deduction to dispositions of qualified small business corporation shares, so a seller who would qualify has a reason to prefer a share sale. Expect a seller to ask for more to accept an asset structure.