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Buying An Existing Business
When you are considering owning a business, you will find that you have the option of either buying and existing business or starting up a new business. The option you choose will have a significant effect on how you account for the purchase of the business assets for income tax purposes.
Careful planning with a Chartered Accountant is warranted. Contact Keith Anderson CA at (780) 447-5830 if you need advice.
When you buy an existing business, you generally pay a set amount for the entire business. In the case of a purchase of business assets, the purchase and sale agreement sets out a price for each asset, a value for the inventory of the company and, if applicable, an amount that you can attribute to goodwill. Alternatively, the purchase and sale agreement could be for the sale of shares of the existing business.
Purchase of Assets
The purchase of business assets is more complex than the purchase of shares. If the individual asset prices are set out in the purchase and sale agreement, and the prices are reasonable, then you should use these prices as the basis for items including inventory and capital cost allowance. If the individual asset prices are not set out in the contract, you have to determine how much of the purchase price you should 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.
The amount you allocate to each asset should approximate the fair market value (FMV) of the asset. You should allocate to goodwill the balance of the purchase price remaining after allocating the FMV to each asset and to inventory.
Example
You can determine the value of the goodwill by subtracting the total value of the net identifiable assets from the purchase price:
Once you have determined the values for the assets and the goodwill, add the fixed assets (e.g., buildings and equipment) into the appropriate prescribed classes for the purpose of claiming the capital cost allowance. The goodwill is considered to be an eligible capital expenditure, which is treated in a manner similar to assets eligible for capital cost allowance.
Treat the value of the inventory as a purchase of goods for resale, and include it in the cost of goods sold in your income statement at the end of the year. For GST/HST purposes, if you buy a business or part of a business and acquire all or substantially all of the property that can reasonably be regarded as necessary to carry on the business, you and the vendor may be able to jointly elect to have no GST/HST payable on the sale by completing Form GST44, Election Concerning the Acquisition of a Business or Part of a Business. You and the vendor must both be GST/HST registrants, and you both have to agree that the sale will not be subject to GST/HST. In addition, the purchaser must buy all or part of the business and not only individual assets.
Usually, for the election to apply to the sale, the purchaser has to be able to continue to operate the business with the property acquired under the sale agreement. The purchaser has to file Form GST44, Election Concerning the Acquisition of a Business or Part of a Business, on or before the day he or she has to file the GST/HST return for the first reporting period in which the GST/HST would have become payable on the purchase, if the purchaser had not filed the election.
Purchase of Shares
The purchase of shares of an existing business is less complex. This does not affect the cost base of the assets of the business for tax purposes. As explained in the Incorporation section, 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.
In certain circumstances, a change in ownership could result in the company being subject to the “acquisition of control” tax rules. Included in these rules, a deemed year-end for the corporation may arise at the time of sale. A deemed year-end for tax purposes requires the company to file a tax return and pay tax for the period up to the date the ownership changed. Also included in these rules are requirements, such as but not limited to, aging non-capital losses another year, writing down any assets whose Fair Market Value is less than their carrying value and writing off all net capital losses carried forward by the company.
Careful planning with a Chartered Accountant is warranted. Contact Keith Anderson CA at (780) 447-5830 if you need advice.
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