Taxes when buying a family franchise business
By Hank Bulmash | February 19, 2012
Cel asked:
If I buy a running franchise business do I pay tax on top of the asking price?
Hank Bulmash answered:
If you buy the assets of a business, you will have to pay GST/HST on the purchase including goodwill. This doesn't really cost you anything since the GST/HST is a flow-through tax that is neutral to businesses. Your business will be able to claim a GST/HST input tax credit on the full amount of GST/HST paid. Be sure your business is registered for GST/HST before you buy assets.
Because no tax is ultimately payable on the transaction, CRA does provide a method to avoid dealing with GST/HST on the purchase.
You and the vendor may be able to jointly elect to have no GST/HST payable on the sale by completing Form GST44, Election Concerning the Acquisition of a Business or Part of a Business. You and the vendor must both be GST/HST registrants, and you both have to agree that the sale will not be subject to GST/HST. In addition, the purchaser must buy all or part of the business and not only individual assets.
Usually, for the election to apply to the sale, the purchaser has to be able to continue to operate the business with the property acquired under the sale agreement. The purchaser has to file Form GST44, Election Concerning the Acquisition of a Business or Part of a Business, on or before the date the GST/HST return for the first reporting period must be filed. That's the return pursuant to which the HST/GST on the purchase would have been payable if the election were not filed.
ON the other hand, you may choose to buy the shares of the vendor's corporation instead of the corporation's assets. There is no HST/GST payable when you purchase shares. Often the vendor will prefer that you buy shares because he may be eligible for the capital gains exemption if he sells corporate shares. For that reason, he might give you a better price on the share purchase rather than the asset purchase.
Before you buy shares of someone's corporation you need to proceed very cautiously since the corporation may have liabilities that you (and maybe even the vendor) are not aware of -- such as back taxes (perhaps on reassessments that haven't be issued yet), or warranty claims or lawsuits from customers or suppliers.
The crucial point is to be sure you get competent legal and accounting advice before buying the shares or assets of a business. The purchase of a business is a big step and you must be careful.