You forgot about the penalties and interest on the penalties. It can be significant.crossborderguy wrote: ↑Dec 19th, 2017 11:34 amBefore this gets side-tracked...
There are a few simple points to remember when it comes to a business purchase:
- Sellers like share sales. (They get the capital gains exemption on the sale.)
- Buyers like asset sales. (Zero risk to the buyer, and a new CCA pool.)
The sale transaction and associated price is always a compromise between the two methods. If there is a risk (like the tax risk you are talking about) then the sale price needs to be adjusted up or down to reflect that risk. If the sellers insist on selling the shares, then decrease your offer.
The next thing you need to figure out is the reassessment exposure if you did acquire the shares. So assuming that $20k/yr is ineligible, and assuming a 13.5% tax rate, that is exposure of $2,700/yr that CRA could hit you with. With interest on the back taxes, let's call it an even $3,000. And assuming CRA assesses 3 years worth of returns, that's a possible $9,000 exposure.
It's not so cut and dried as you want to make it seem. Even if the buyer took this approach, the problem is the sellers are not going to accept the discount (which I dare say should likely be way more than you estimate) because they are not looking at it from the point of the view of the buyer who is factoring in possible interest and penalties. The only way to ensure that (and I don't agree this is an advisable approach or even that this company should be purchased by the OP) is to let them know the discount if for the potential tax assessment due to them cheating on their taxes. One is HARDLY going to bring that up!crossborderguy wrote: ↑Dec 19th, 2017 11:34 amSo there you go, you've quantified the risk. If the sellers want $200,000 for the business (and you were originally OK with that), you offer $190,000, and put $10k away in a savings account as a contingency fund should CRA reassess. Don't grenade a good deal just because of a possible tax risk. Quantify the exposure first, then make a decision as to whether or not you want to deal with the headache.
People who should be ratted on don't like rats. The rest are happy that the culprits got caught. The point you miss about 'listening to some of the advice in this thread' (which obviously is a not so veiled reference to the advice to do the right thing and reporting these fraudsters) is that is being done anonymously and anyone could have reported them, in the town or elsewhere.crossborderguy wrote: ↑Dec 19th, 2017 11:34 amAlso, if/when you acquire the shares, the tax return will change in terms of shareholders and stuff like that. CRA will see the change in ownership, along with the expense changes. Usually if they see an owner change, they are less concerned about the expense variances, or so we are told. Something to thing about anyway.
Lastly, I don't know what neighbourhood you are from, but most people don't like rats. If you get labelled as one, it is hard to get away from that reputation, especially in a small town. I'd be cautious about listening to some of the advice in this thread.
I started, bought and sold many businesses in my career. I'd run away from this deal as fast as I can.