Client purchasing shares of a business. Few hundred thousand dollar balance due to shareholder.
If client buys business do they acquire the shareholder balance? Example purchase of shares for $500,000 and now I created 200,000 of tax free withdrawals.
âClient purchasing shares of a businessâ
âIf client buys business do they acquire the shareholder balance? Example purchase of shares for $500,000 and now I created 200,000 of tax free withdrawals.â
If a taxpayer purchases a corporation by purchasing all of its shares, than obviously what the taxpayer is purchasing is THE SHARES OF THE CORPORATION.
The Assets and liabilities of the corporation remain untouched.
If the corporationâs books still show that a specific third party is owed a loan balance, then the corporation has to pay it.
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" now I created 200,000 of tax free withdrawals.â"
??? How on earth would that occur?? Magic wand? Alien technology? 
The purchaser should consult in detail with his/her Professional Accountant before completing the purchase.
There is an existing shareholder balance of 200,000 on the balance sheet. Lawyer advised client that the shareholder balance will transfer to the nee shareholders.
usually such sale purchase agreements mention that as part of deal, seller will get $X purchase price for exchange of Y number of shares and full and final settlement of their shareholder loan. In that case, the outstanding shareholder loan will be written off against retained earning and for seller, it is tax free money (to the extent of shareholder loan).
âThere is an existing shareholder balance of 200,000 on the balance sheet. Lawyer advised client that the shareholder balance will transfer to the nee shareholders.â
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meh⌠I donât buy it.
Previously, I suggested that " The purchaser should consult in detail with his/her Professional Accountant before completing the purchase."
Actually, I should have been more precise.
The Corporation of course will already have its own Professional Accountant, So one of the things to check is the continuity of that Engagement.
If the corporation will be hiring a new Professional Accountant, then both old and new will be liaising together over the legal documentation/Conditions of Sale as it relates to impacts on the Corporation, if any. (Usually not in a pure share sale)
As regards asset acquisition of an investment asset (shares) by the purchasing individual, his personal accountantâs job would be to assist in analyzing the legal documentation to determine exactly what ACB he should be keeping in his records as to the real actual cost (ACB) of his shares, which may or may not be as it first appears.
âseller will get $X purchase price for exchange of Y number of shares and full and final settlement of their shareholder loan. In that case, the outstanding shareholder loan will be written off against retained earning and for seller, it is tax free money (to the extent of shareholder loan).â
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meh⌠I donât get that math.
That paragraph appears to be a mixture of apples and oranges.
The (personal) share price will be the share price, and that will be the sale price that the seller receives FROM THE INDIVIDUAL PURCHASER.
If the Corporation in addition owes the seller loan money, then the seller will also be demanding the balance of the loan due to him FROM THE CORPORATION.
So in total the seller would be getting cash of the two amounts added together.
If that does not balance, then it is being incorrectly recorded.
Then time for the CPA to re-check every piece of documentation!
To me, it sounds like a valuation problem, which lawyer usually doesnât get involved, unless requested upon by the corporation to also get professional appraiser to determine of the FMV of the corporation.
Indeed, it is a valuation issue involved FMV and appearance of âGood Willâ on the Balance Sheet provided that the difference between the ABV and purchase price is not entirely appreciation of capital asset(s).
âIndeed, it is a valuation issue involved FMV and appearance of âGood Willâ on the Balance Sheet provided that the difference between the ABV and purchase price is not entirely appreciation of capital asset(s).â
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Say whaaat?
Just goes to show, this taxpayer should not be rely on the internet advice over what his qualified lawyer and his qualified CPA, in possession of the actual documents, have to advise him, otherwise he will be in a horrible horrible deep messâŚ
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Perhaps I will buy some Microsoft shares tomorrow and then see if they add my additional Goodwill on their next quarterly statements⌠
â Perhaps I will buy some Microsoft shares tomorrow and then see if they add my additional Goodwill on their next quarterly statementsâ
If you are a corp and buy MS corporation beyond the book value of MS, you need to show the difference in your Balance Sheet as Good Will. No?
No!
I assumed the client was a corp taking over another.
For an individual buying the business x, it should be entirely handled by the business xâs accountant as was mentioned by @joe.justjoe1. At personal capacity he/she doesnât have any journal entries.
Would it have been preferable to have a loan from a director rather than from a shareholder?
The way I see it is that if your client pays $500,000 for the deal [not shares], that includes the loan balance. So he really purchased shares for $300,000 and personally paid off the shareholder balance of $200,000. So the ACB of his shares is not $500,000 but $300,000 and now the corporation owes the client the $200,000. You can make a journal entry debiting the old shareholder account and crediting the new shareholder account.
This of course assumes that the legal documents state that the loan balance is paid off. (a safe assumption for this discussion board since the lawyer said that the loan transferred to the client - but you need to check it)
If it doesnât, the loan needs to be paid back because the client purchased the shares for $500,000.
This is an excerpt from an article in the Mar-Apr 2009 CGA Magazine âFlawed Purchase and Sale Agreementsâ.: By J. Thomas McCallum CBV, FCGA
While the account is labelled âdue to shareholderâ, it is really âdue Mr/Ms. X or due XYZ Corporation.â Some accountants struggle with this concept. Two key problems arise. First, and perhaps foremost, the old shareholder could, much to the surprise of the new shareholder, come looking for his/her money. It is a liability no different from any of the corporationâs other liabilities.
In this situation, the client actually owns two securities - shares of the corporation and the debt due from the corporation. The purchase and sale agreement has to show the sale and purchase of both these securities. Say that the sale price is $400,000, and thereâs a âdue shareholderâ balance of $50,000. The price should be allocated: $350,000 for the shares and $50,000 for the debt. Now the purchaser has a debt due from the corporation and he/she is free to draw on it without income tax consequences. Why? Because he purchased it and his adjusted cost base is equal to the liability.
Thatâs exactly it.
If you are the seller, will you be selling your tax free shareholder loan and pay capital gain tax on it?
If you are the buyer, will you be buying a business that doesnât have enough retained earning to pay back the loans you made to the corporation?
Since, as Wonton88 said the ACB is the same as the value of the loan, there is not capital gain.
Yes, thanks, that is what I said above.
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By the apparent structure of the deal, and the reference to âLawyer advisedâ it sounds more like this taxpayer did not consult his own qualified Lawyer nor his own qualified CPA before embarking upon this transaction, but rather just first did his own thing, and the information after the fact is now coming only from the Sellerâs lawyer, and what the taxpayer thinks happened.
If the transaction is not yet complete, it sounds like it would be appropriate to examine all the figures and factors (ie by the purchaserâs Lawyer and purchaserâs CPA) before the signatures are affixed and money changes hands.