Chapter Objectives Be able to: n Explain the rationale for tax deferred sales. n Explain the available alternatives, including the unique characteristics of each, for tax-deferred sales. n Apply each of the alternative to the sale of closely-held corporations.

Tax-Deferred Sales and Acquisitions n In order for the vendor to achieve a continued tax deferral on the sale of a business, it must be prepared to maintain a continuing equity interest in the purchaser’s corporation or the vendor corporation. A vendor who receives shares as part of the sale transaction incurs continued risk but also the opportunity for continued growth in value. n The nature of the payment received for the property distinguishes a tax-deferred sale from a taxable sale. A tax-deferred sale involves payment in the form of shares issued by the purchasing corporation. Whereas, a taxable sale involves the payment of cash or the deferred payment of cash secured by interest-bearing notes. n The three reasons why a vendor may be prepared to accept shares for payment are: the vendor wants to participate in the continued growth of the business, the vendor wants to enhance after-tax return on investment, and the purchaser may not have sufficient cash.

Tax-Deferred Sales and Acquisitions (continued) n The four alternative courses of action available when arranging a tax- deferred sale are: sale of assets at an elected price equal to the assets’ tax value; sale of shares at an elected price equal to the shares’ tax value; corporate amalgamation; and share capital reorganization. n When assets are sold using the tax cost as the elected price, a purchaser must weigh the impact of reduced funding requirements against the impact of new dividend requirements and reduced CCA. n When shares are sold using the tax cost as the elected price, the concerns are the generally the same as for assets sold, except to utilize the election, the purchaser and the vendor must formalize their intentions by signing a tax agreement. A solution to this problem is using a less formal tax-deferred method of selling shares, referred to as a share-for-share exchange.

Tax-Deferred Sales and Acquisitions (continued) n In an amalgamation, shareholders of the former corporations exchange their shares for shares of the new corporation and all of the assets of the former corporations are transferred to the new corporation. As a result, the amalgamation process combines a share sale with an asset sale and in a tax-deferred exchange of shares and assets. n Share-for-share exchanges and amalgamations are most common amongst public corporations since the new shareholders will have the flexibility of selling their new shares in the open market or holding them for future returns. n Share reorganizations are more risky since the shares received are for the vendor corporation which is more risky than receiving shares of the purchaser corporation. This method is appropriate when the seller has significant confidence in the purchaser’s ability to manage the acquired business.

Sale of a Closely Held Corporation n The closely held corporation is a corporation with a small number of shareholders and there is typically a close financial relationship between the corporation and its shareholders. Consequently, there are typically special circumstances to address in any sale of the business. n Some special features that may arise are: the corporation’s assets may include investment (non-active) assets; potential purchasers, like other family members or employees, may not have adequate cash to purchase the business; and the primary shareholder’s reason for selling is his/her intention to retire.