Business sale - share sale

Tax Topics
1

My client is selling his business using share sale option. It doesnt not qualify for the LCGE.

Let’s say the balance sheet has only three items on the closing date. Assume retained earning is nil.

DR. PPE $1,100 CR. DUE TO SHAREHOLDER $1,000 CR. Common share $100

The owner sold his shares to transfer the ownership of the business to the buyer.

The company doesnt have any cash to pay off the due to shareholder. Share sale price is $1,500.

Question 1. I should record the share sale in seller’s T1. Since the original owner did not recover his shareholder loan, should I increase the ACB of the share to $1,100 (common share 100 + due to shareholder 1,000)?? So the gain is 400??

Question 2. After the buyer takes over, what should I do with the $1,000 due to shareholder? Can the new owner use this and withdraw money up to 1,000 without paying any taxes? Some people told me to increase the cost of common share by 1,000 and write off due to shareholder, but I dont think this is right as the cost of the share remains the same (100 as 1,500 share price is the money exchanged between individuals). Please tell me the correct accounting treatment from the corporation’s perspective after the ownership has been transferred to the new owner.

Thank you!!

2

I would treat sale price 1,500 for 1,000 loan and 100 share capital. Vendor has an ABIL of 400, no capital gain. Purchaser has 1,000 he can draw down from the corp and 400 ACB of the shares.
The only change within the corporation is the name of the shareholder, of both the share and the loan.

3

You need to check exactly what the agreement of purchase/sale says. I expect the seller has an ABIL of $1,000 on his T1 for the year of sale, and the corp has a forgiveness of debt. Which makes sense - if one party gets a tax benefit, the other gets a tax liability. Check out the debt forgiveness rules. The forgiven debt is applied in a specific order. If shares were sole for $1,500, then you can’t arbitrarily change that.