Tax Tips When Buying a Business in Canada | FBC, Canada's Farm & Small Business Tax Specialist

Tax Tips When Buying a Business in Canada

Tax Tips When Buying a Business in Canada

Tax Tips When Buying a Business in Canada

Buying a business in Canada is a big, exciting step with many opportunities and risks.

On the plus side, buying a business means you get an immediate revenue stream and customer base. The previous owner might even be able to help show you the ropes in the early stages.
 
On the other hand, buying your own business might mean needing more money for financing, you might inherit liabilities from previous owners, and/or the assets might not be worth as much as you thought. There are also a lot of tax-related responsibilities and requirements that get overlooked.
 
To ensure the business is successful, it’s imperative that you conduct thorough due diligence on it and are fully aware of what you are taking on.

The more you know, especially from a tax standpoint, the more leverage you may have when it comes time to negotiate a price. Either way, it could end up affecting your bottom line for years to come.

Buying a Business in Canada

There are 2 ways to buy a business in Canada:

  1. Purchases the assets of the business
  2. Buy the shares of the company that run the business

There are tax advantages to both. 

Asset Purchase

With an asset purchase, you buy the assets of the business. This can include, inventory/stock, accounts receivable, furniture, equipment, etc.

When you buy the assets of a business, you can claim a capital cost allowance based on the price paid for each depreciable asset.
 
The type of assets being purchased and their value will determine how the buyer can expense or amortize the purchase. Naturally, the buyer and seller will vie for the most beneficial way to structure the purchased assets and price of the company.
 
As the buyer, you will want as much of the purchase price as possible to be attached to the assets that will depreciate quickly. The seller, meanwhile, will want to avoid this as it forces them to report a larger amount of taxable income.  
 
The tax implication of buying a business in Canada is huge. You might think that you saved money on the purchase price, but depending on how it’s structured, the tax burden may be a lot higher and more severe than you ever thought.
 
Another benefit of an asset purchase is that you do not inherit any of the liabilities of the business. You are essentially starting your new business with a clean set of books.

Purchase of Shares

If the business is incorporated, you may want to buy the shares of the company, especially if the company has a great name.

When you buy all the shares you end up with all of the assets of the business. Though you can opt to buy just the assets of an incorporated business.
 
If it’s a small business, the seller will probably want to sell the shares; doing so will let them take advantage of the $800,000 capital gains deduction. Which means the sellers may also accept a lower price than if the assets were sold.
 
There are downsides. As the buyer, you are also purchasing any outstanding tax and legal liabilities. You’re essentially buying the history of the company. If the Canada Revenue Agency (CRA) conducts an audit after you have done an all-share purchase and discovers that taxes are due for years prior to you owning the business, you, as the shareholder, are responsible and need to pay up.
 
Whichever scenario you decide to take, it’s important that you find good accounting and tax advice before agreeing to anything. Doing so could save you a lot of money and headaches.

Changing Ownership

One you buy a business, whether an asset purchase or share purchase, you will need to contact the tax professionals you deal with and let them know about the change in ownership. If the business is registered, you’ll probably need to change those names as well.

Contacting CRA

The CRA also wants to be kept in the loop.

If you’ve purchase a business in Canada, you will most likely need to submit additional forms with the CRA when you file your income taxes.

You will also need to notify the CRA that you are now the owner of the business. When you call the CRA about being the owner of a new business, you will need its business number. In some cases, the CRA will tell you that you need to register for a new business number.

FBC, Helping Canadians Navigate the Purchase of a Business

If you’re thinking of buying a business in Canada, contact the tax professionals at FBC. Whether it’s an asset purchase or all-share purchase, every transaction is unique, with its own financial, legal, and tax challenges.

With 65 years of experience, the tax experts at FBC can provide you with the expertise and knowledge needed to successfully buy a business in Canada.

FBC has worked exclusively with small business owners, farm operators, and independent contractors since 1952. Over the years, we’ve helped clients from across the country navigate the often-confusing experience of buying a business and the associated tax benefits and hurdles.
 
At FBC, we also understand that no two businesses are alike; each one requires different financial and tax planning needs. That’s why we are the only accounting firm in Canada to provide a unique service. For a fixed fee, Members get year-round access to our tax planning, tax preparation, consultation, bookkeeping, and financial planning services. FBC also provides all new Members with a review of their previous 3 years’ tax returns.

For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.

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