Why is there no tax basis step-up for a buyer in a share purchase?

A step-up is a rise in the tax cost of a business’s assets to what the buyer paid for them. It happens when assets are bought and not when shares are bought, because the shares change hands while the corporation stays exactly as it was. The corporation remains the same taxpayer with the same tax history, so the price buys the new owner a cost for the shares and nothing more.

Where the purchase price goes

The buyer’s price becomes the buyer’s cost of the shares, which matters only when the buyer later sells them. It does not enter the corporation’s tax records. The Income Tax Act builds a corporation’s undepreciated capital cost, the balance on which capital cost allowance is claimed, from the capital cost to that taxpayer of each depreciable property, and that cost does not change because someone else now owns the shares. The CRA’s guidance on a change of owners of a corporation is to update the registry and its owner information, while a new owner of a sole proprietorship must get a new business number.

The narrow route to a higher cost

The Act has a limited exception in its winding-up rules. When a taxable Canadian corporation winds up a subsidiary in which it holds the share ownership the Act requires, the parent can designate an increase in the cost of certain capital property it receives. The increase is capped by the property’s value when the parent last acquired control compared with its existing tax cost, and depreciable property is among the categories excluded. It also depends on how far the price paid for the shares exceeds the subsidiary’s own tax cost in its net assets. This is a planning step for an accountant, not a default.

How it shows up in the deal

A buyer who accepts no step-up pays for value that produces no extra deductions, so the structure often shows up in price talks. Sellers have their own reasons to favour a share sale: the CRA says a seller of qualified small business corporation shares may be eligible for the capital gains deduction. The two sides’ interests differ, so structure and price are usually settled together with advisors. For the other structure, see what a buyer pays tax on.