- Every asset a business owns — equipment, real estate, intellectual property — has a tax cost (sometimes called its cost base) that was established when the corporation first acquired or…
- In an asset purchase, the buyer and seller identify and price each asset being transferred, and the buyer generally gets a new tax cost in those assets equal to what it paid — a real,…
- Because the corporation's tax cost in its assets doesn't change, a share purchase buyer can end up with less ongoing tax relief on those assets than an asset purchase buyer paying the…
Buyers negotiating a share purchase sometimes assume that, because they are paying today's fair market value for a business, the tax cost of everything inside the corporation resets to that value once the deal closes. It doesn't. When you buy shares, you buy the corporation exactly as it is — including whatever tax cost its assets already had, which is often far lower than what you just paid for the business.
This is one of the most consequential, and least visible, differences between an asset purchase and a share purchase. It doesn't show up in the purchase agreement's headline price, but it can shape the buyer's tax position for years afterward. Here's what it means in practice, and how buyers typically account for it in negotiating the deal.
What "Tax Cost" Means, in Plain Terms
Every asset a business owns — equipment, real estate, intellectual property — has a tax cost (sometimes called its cost base) that was established when the corporation first acquired or built it, adjusted over time by rules like depreciation for tax purposes. That tax cost is what determines the tax consequences the next time the asset is sold, or the amount that can still be depreciated for tax purposes going forward.
A business that has operated for years, especially one that has depreciated its equipment or built up goodwill internally, often has assets with a much lower tax cost than their current fair market value. That gap between tax cost and real value is exactly what a buyer is implicitly paying for when it buys the shares of a business worth more than its balance sheet suggests.
Why a Share Purchase Doesn't Reset It
In an asset purchase, the buyer and seller identify and price each asset being transferred, and the buyer generally gets a new tax cost in those assets equal to what it paid — a real, ongoing tax benefit for the buyer.
In a share purchase, none of that happens. The buyer is not acquiring assets at all — it is acquiring shares of the corporation that owns them. The corporation itself doesn't change; it keeps its own historical tax cost in every asset it holds, no matter what the buyer paid for the shares that sit on top of it.
| Asset Purchase | Share Purchase | |
|---|---|---|
| What the buyer actually acquires | Specific identified assets | Shares of the corporation |
| Tax cost of the underlying assets after closing | Generally reset to the price paid | Unchanged — stays at the corporation's historical cost |
| Ongoing depreciation for the buyer | Based on the new, higher cost | Based on the corporation's existing, often lower, schedules |
| Where the gap in value sits | Priced and allocated at closing | Remains embedded, invisible, inside the corporation |
The Practical Impact on the Buyer
Because the corporation's tax cost in its assets doesn't change, a share purchase buyer can end up with less ongoing tax relief on those assets than an asset purchase buyer paying the same price would get. It can also mean that a built-in gain already exists inside the corporation — meaning some of the value the buyer just paid for is, in a tax sense, a gain waiting to be triggered whenever the corporation eventually sells those assets, even years down the road under the buyer's own ownership.
Some buyers address this with specialized post-closing tax planning available only in narrow circumstances and for certain kinds of assets. That kind of planning is technical, deal-specific, and needs to be raised with a tax lawyer or accountant well before the deal is signed — not treated as a routine fix.
How Buyers Typically Adjust for This
- Confirm the structure early. Whether the deal will be an asset purchase or a share purchase should be settled — or at least seriously discussed — before the letter of intent is signed, since it affects almost every later step.
- Request the target's tax cost and depreciation schedules during due diligence. A buyer negotiating a share purchase should see how far apart the corporation's tax cost and fair market value actually are before finalizing price.
- Factor the gap into price negotiations. Because a share purchase buyer loses out on the fresh cost base an asset purchase would have given it, this is a legitimate factor in negotiating the purchase price or other deal terms.
- Ask whether any post-closing tax planning is realistic for your deal. This depends entirely on the target's asset mix and the technical requirements involved — it is not available in every share purchase.
- Get representations and warranties about the target's tax filings and cost base records. If the numbers underlying the tax cost turn out to be wrong, that is exactly the kind of risk representations and indemnities in the purchase agreement are meant to cover.
Frequently asked questions
Does this mean I should always prefer an asset purchase as a buyer?
Not necessarily. A fresh tax cost is a real advantage, but sellers often resist asset purchases for their own tax reasons, and asset purchases bring their own complexity — every asset and many contracts need to be transferred individually. The right structure depends on both sides' priorities, not just this one factor.
How do I find out how big the gap is between tax cost and value?
This comes from the target corporation's own tax and accounting records, reviewed as part of due diligence — your accountant is best placed to assess how significant the gap actually is for a specific target.
Can the purchase agreement itself fix this problem?
The purchase agreement can address related risks — through representations, warranties, and price — but it cannot change how Canadian tax law treats the corporation's assets. The underlying tax cost issue is a matter of tax law, not contract drafting.
Does this affect goodwill the same way it affects equipment?
The same general principle applies — the corporation's existing tax position in its goodwill and other assets carries forward in a share purchase — though the specific mechanics differ by asset type. Ask your accountant to look at the full asset mix, not just one category.
This is a business purchase or sale question
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