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 | Buying
Your Practice - Different Tax Angles to Consider- Volume 17
by David Chong Yen (Nov. 2004) |
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Should the purchaser of a dental practice buy
shares or assets? Let's look at a summary of some of the tax issues.
When you purchase assets, cash in the vendor's bank account, the vendor's accounts
receivable or bills owing by the vendor are generally excluded from the deal.
In a share purchase, the price reflects the value of the business as a whole,
rather than the value of its individual assets. When you purchase shares, you
become the shareholder of the corporation. The corporation is a separate legal
entity, and it owns all the assets and owes all the debts including any corporate
taxes, payroll taxes and suppliers' bills.
Listed below are the advantages
and disadvantages for each method of acquisition.
Purchase of Assets:
Advantages:
- Ability to negotiate
the allocation of the purchase price among the assets acquired (goodwill, equipment,
dental supplies, etc.). The negotiated allocation will determine the future tax
write off available to you the purchaser. Certain types of assets, such as inventory,
has more favourable tax write off than dental equipment, leasehold improvement
or goodwill; and
- The purchaser is usually not responsible for any of the
vendor's outstanding debts or bills. The rare exception is the possibility of
severance associated with the termination of employees who may have worked for
the vendor. Consult your lawyer on this issue.
Disadvantages:
- Normally, you will have to pay a higher purchase price for assets because of
the higher tax write off available; and
- You may also have to pay the Goods
and Services Tax (GST) and or Ontario Retail Sales Tax (PST), which are levied
on certain items. This will be in addition to the "purchase price".
Purchase of Shares:
Advantages:
- As a rule, the vendor is willing to accept a lower purchase price as the vendor
could possibly escape taxes on the sale, due to the $500,000 lifetime capital
gains exemption.
- No GST or PST is payable when you purchase shares.
Disadvantages:
- The corporation
is liable for all its disclosed or undisclosed debts including those contingent
debts that could arise based on future events.
- There are very limited tax
write offs.
Summary:
Buyers usually want to buy assets as
they receive certain tax deductions. Sellers usually want to sell shares as they
pay less tax when they sell shares as opposed to assets. Specifically, if shares
are purchased, the price will probably be reduced. Usually a compromise is made.
Most valuations or appraisals prepared by leading business brokers to the dental
industry are based on assets and not shares.
Understanding what you are buying
is rather important as it has legal and tax implications. More importantly, it
affects the true after tax amount you will pay as a purchaser. Work closely with
your lawyer and accountant to ensure all aspects are in order.
Interested
in knowing the seller's thought process? Review my next article "Selling
Your Practice - Different Tax Angles To Consider" appearing in the next issue
of The Professional Advisory.
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