Asset Purchase or Share Purchase When Buying a Manitoba Business

Before price, financing or closing dates, you usually have to settle one question: are you buying the business's assets, or the shares of the company that owns it? The answer changes your tax position, the debts you may inherit, and the steps the seller has to take.

This article explains the main differences in plain terms for a Manitoba purchase. It is general information, not advice on your deal. The right structure depends on the facts, so a lawyer and an accountant should look at your numbers before you commit.

This article covers the law of Manitoba.

What the two structures mean

In an asset purchase, you buy specific things the business uses, such as equipment, inventory, goodwill and contracts you agree to take over. The seller keeps the company and anything you leave behind. In a share purchase, you buy the company itself, so the company carries on with all its history, including past obligations.

Neither is always better, and the final structure is usually a negotiation.

Bulk sale rules apply to asset deals only

Under Manitoba's The Tax Administration and Miscellaneous Taxes Act, a sale in bulk includes a sale of inventory outside the ordinary course of business, or of tangible personal property used in the business if it is sold in connection with the seller ceasing to carry on that business or part of it. Before disposing of the property, the seller must apply to the director (Taxation Division) for a certificate showing there is no tax debt, or that satisfactory arrangements to pay it have been made.

The director issues the certificate in duplicate, and the seller must give one duplicate to you as the buyer. If you do not obtain it, you are liable for the seller's tax debt as at the date of sale, including amounts assessed later for earlier transactions, and the debt may be enforced against you, the seller or both. If you do get the duplicate, a tax debt found later that existed when the certificate was issued may be enforced against the seller but not against you.

The Taxation Division issues the clearance certificate with no fee, and the seller's application must include the sale agreement with a breakdown of the price by asset class. A share sale is different: Taxation Division guidance says a sale of shares or partnership interests is not a sale of business assets that comprises a bulk sale.

Tax differences: GST/HST and tax values

A sale of business assets is generally subject to GST/HST. You and the seller can jointly elect on Form GST44 to pay none if you acquire all or substantially all (at least 90%) of the property needed to carry on the business. The election must be filed on or before the day your GST/HST return is due for the first reporting period in which GST/HST would otherwise have been payable.

The election has limits. It is not available if the seller is a GST/HST registrant and you are not, you must be able to keep operating the business with the acquired property, and GST/HST still applies to certain items such as taxable services by the seller, taxable leases or licences, and taxable real property if you are not a registrant. A share purchase generally does not attract GST/HST.

Tax values also differ. In an asset purchase, you use the agreement's reasonable prices for each asset for capital cost allowance. Otherwise, fair market value is allocated to each asset and inventory, and the rest goes to goodwill, which goes into Class 14.1. Buying shares does not change the tax values of the company's assets.

Seller approval, employees and the seller's tax position

If the seller is a corporation selling all or substantially all of its property outside the ordinary course of business, The Corporations Act (Manitoba) requires shareholder approval. The sale is adopted when the holders of each class or series entitled to vote approve it by special resolution, and the meeting notice must include or attach a copy or summary of the agreement and state that dissenting shareholders may be paid fair value. A shareholder may dissent and claim fair value, subject to other provisions of the Act and any unanimous shareholder agreement.

For employees, the Employment Standards Code provides that when a business or part of it is sold or transferred so that control passes to another person, employment is deemed continuous and uninterrupted, so service carries over to an asset buyer. This applies only to the minimum-standards Divisions 2 to 5, 9 and 10 of Part 2, not to every employment entitlement.

Sellers often prefer to sell shares because of the lifetime capital gains exemption. It applies only to qualified small business corporation shares, which must not have been owned by anyone other than the individual or related persons throughout the 24 months before the determination time, and the corporation must be a Canadian-controlled private corporation whose asset value is mostly from qualifying assets. An asset sale by the corporation does not give the shareholder that exemption directly.

Quick comparison

Practical next steps

Whichever structure you choose, check what you are buying before you sign. A lawyer can help structure the deal and run the searches below.

• Search the Personal Property Registry using the seller's exact legal name, since any person may request a search by debtor name and a name error can matter.
• Use the Manitoba Companies Office online searches and file summaries to confirm the corporation exists and to check its directors and filings.
• In an asset deal, make the bulk sale certificate and the GST44 election part of the closing plan.
• After closing, tell the CRA about changes of owner, partner or director, and ask whether a new business number is needed.
• Ask a tax adviser about Retail Sales Tax and Land Transfer Tax for your particular deal.

Frequently asked questions