Due to shareholder upon sale of business

As others have stated, you do need to see the buy/sell agreement.
Normally, what I have seen and advised, is the the “purchase price” is first allocate to the buy/sell of the SH Loan, then any amounts over that become the Proceeds on the sale of the shares.
So for the purchaser, they would buy the SH Loan, then have an ACB of the shares equal to the difference.
The vendor has sold the loan for cost and then a possible capital gain/loss on the shares depending on the POD and ACB…
Now, if the Purchase Price does NOT cover the shareholder loan, then the difference in the SH loan is forgiven debt of the company. Ie sold for less than value, and the vendor ( original SH loan owner) has relinquished his rights to collect any further amounts from the company, and the purchaser cannot pay himself a tax free SH when he didn’t pay full value for it.
Talk to a local CPA as well.
If the buy/sell agreement didn’t break this part down, then both parties may “amend” it so they both report the same method. Again, make sure the lawyers address this as we as accountants cannot prepare legal agreements.

So, you are selling the loan and the share, not just the share then

Once more: Agreements are binding on the parties signing thereto. One cannot simply “make up” how the agreement between two (arms’-length) parties is to be interpreted. Timing, and documentation, is everything. Splitting it into component parts is helpful:

If the agreement is silent on the nature of the S/L, then the price is all for the shares, as, and until (if) the original shareholder releases the company from the debt obligation. This should be in writing. Otherwise the original S/L stands in place and the old shareholder can collect (as sometimes occurs) later.

If the two happen contemporaneously, and the agreement specifies release of the S/L as included in the overall purchase, then the purchase is allocated first to the S/L and second to the share purchase (this will become the purchaser’s ACB) and the new shareholder will acquire the old shareholder’s S/L which s/he can repay in the future.

If the agreement is silent, and LATER the old shareholder releases the debt, there is a corporate gain on settlement on debt with the associated grinding mechanism taking place to account for it. The original agreement stands as-is, and the entire amount paid is for the shares.

This is why @joe.justjoe1 keeps insisting on involving professionals (right Joe?). While I don’t always agree that every business needs a pro for every type of transaction, there are some where the costs of not involving one can be considerably greater than the costs of doing so.

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yes @SmallBizGuy - I see it as compulsory that the purchaser would be foolish to throw away 1/2 million dollars plus hidden potential liabilities without the benefit of those with in-depth knowledge of contract law, income tax law, and financial analysis on his team.

Although, maybe there are those taxpayers who would consider such a thing as “just another night at the Casino”… :game_die:

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The share purchase and loan are two separate items and really is simple if you keep it that way.

The share purchase price is agreed upon based on what the parties negotiate and agree they are happy with. This includes the company owing a loan payable to the old shareholder.

The loan payable to the old shareholder remains and gets paid whether the company has the cash to do, gets a loan, or the new shareholder loans the company money to repay the old shareholder.

All terms and conditions get agreed to up front, papered and Bob’s your uncle.

Thank you Cliff for clarifying, it is exactly as you say.

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