Finance and taxation matters varies with the type of legal structure the investment will be based upon and the business acquisition deal arrangement. While considering becoming a business owner, you have the option of buying an existing business or starting a new one. The option you choose will affect how you will account for the purchase of the business assets for income tax purposes.
Asset Purchase Arrangement
When you buy a business, you generally pay a set amount for the entire business. In some cases, the sale agreement sets out a price for each asset, a value for the inventory of the business and, if applicable, an amount that can reasonably be attributed to goodwill.
If the individual asset prices are set out in the sale agreement, and the prices are reasonable, then you could use these prices to calculate your claim for capital cost allowance (CCA).
If the individual asset prices are not set out in the contract, you have to decide how much of the purchase price you should reasonably attribute to each asset, how much to inventory, and how much, if any, to goodwill. These amounts should coincide with the amounts the vendor determined when reporting the sale.
Share Purchase Arrangement
Another way of acquiring an existing business is to buy the shares of a corporation. This does not affect the cost base of the assets of the business. A corporation is a separate legal entity and can own property in its own name. A change in the ownership of the shares will not affect the tax values of the assets the corporation owns. Generally, the purchase of shares of a corporation is not subject to GST/HST.
Other matters that need to considered that will impact the tax implications and financing decisions of the company will include:
– Business number (BN) – includes payroll and GST/HST
– Change of ownership
– Value of inventory and other assets
– Capital gains deduction
– Tax implications
– Restrictive covenant