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  • Aug 12th, 2019 1:11 pm
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[OP]
Deal Addict
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Oct 29, 2002
1825 posts
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Toronto

Acquiring business with a loss

Business partner and I co-own a business under our own corporations. The business is down money and we will probably close it. His personal corp is up money. He wants his corp to wholly acquire our failed business, so he can offset the losses against the gains in his personal corp.

I feel this is a bad idea and could cause problems. Would rather just wind it down.

thoughts?
9 replies
Deal Addict
Sep 19, 2009
2076 posts
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Toronto
It is a very good idea. Corporations often buy failed businesses for their past capital losses.

You should try to value properly this. You also need to remember that past capital losses can be used in the future to offset new capital gains, by yourself, if you don't sell it.
[OP]
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Oct 29, 2002
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andrew4321 wrote: It is a very good idea. Corporations often buy failed businesses for their past capital losses.

You should try to value properly this. You also need to remember that past capital losses can be used in the future to offset new capital gains, by yourself, if you don't sell it.
I guess valuing it is the issue. He wants to just take it, but obviously those losses are worth something, so it should be sold.
Newbie
May 21, 2019
21 posts
5 upvotes
Corporations must satisfy certain conditions before buying another business with losses and use these non-capital losses for their own.

Here is the link to CRA site re: acquiring another corporation with losses.

https://www.canada.ca/en/revenue-agency ... 87.html#12

I strongly recommend your partner to talk to his accountant to make sure he can use the losses. If there's no benefit then I would agree to just wind it down. If there is a benefit, you and the partner should work out details of the sale because the business is worth something to your partner.
[OP]
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Oct 29, 2002
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What would a business with $5m in losses be worth to a purchaser that is confident the losses would satisfy the necessary CRA conditions?
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Apr 21, 2014
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chowder wrote: What would a business with $5m in losses be worth to a purchaser that is confident the losses would satisfy the necessary CRA conditions?
If the tax rate is 20% and they can fully use the losses then the value to an acquiring company is around 20% of the losses. So the sale price should probably between 0 and that number. I would probably pay 25% of that number at most because there will be lots of tax/transaction/admin costs.
[OP]
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Oct 29, 2002
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abc123yyz wrote: If the tax rate is 20% and they can fully use the losses then the value to an acquiring company is around 20% of the losses. So the sale price should probably between 0 and that number. I would probably pay 25% of that number at most because there will be lots of tax/transaction/admin costs.
so for 5m in losses, at most you'd pay 1.25m?

note: i think corp tax rate is 26%
Newbie
May 21, 2019
21 posts
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chowder wrote: so for 5m in losses, at most you'd pay 1.25m?

note: i think corp tax rate is 26%
How much the business is not worth is not solely based on the the amount of losses it has. You should ask these questions:

- Is the business active?
- Does the business have assets?
- What does the financial statement look like? What are the liabilities?
- Is the business still on-going even though it is losing money
- Is the $5 million in losses confirmed by CRA or based on some verbal interaction?
- Does the failed business, once assumed, interfere with your own business - if yes, agreement should have some clause limitations

You need to properly value the business (through a Certified Business Valuator) in order to assess the right price. Yes you will be paying a price for his/her services but at least you have an independent and trained valuator to help you determine a fair price. Then you can negotiate from there.

The losses are but one part of the equation. I strongly recommend you to hire an accountant/look for a CBV - especially with $5 million in losses.

Good luck.
Deal Fanatic
Sep 23, 2007
5061 posts
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I think you need to distinguish paper losses vs actual loss. Since there is a partner involved, how would the sale be transacted?

For $5M loss and potential for massive tax savings, you better talk to an accountant for some real advice based on relevant facts. There are surely many CRA rules that may prohibit what you are trying to do. I doubt you can successfully make a transaction solely for the sake of reducing tax. There is a general principal that business transactions be incurred with a view for profit.

The same way that you are willing to spend thousands to get an accountant to get this right, the CRA is likewise equally likely to invest resource to disallow your claim if 1.25M is on the line. Your question is too technical and the amount too large to rely on internet forum advice. I was half expecting you to say this is some small business, in which case I think a lot of people will tell you not to bother due to all the professional fees to make it happen.
[OP]
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Oct 29, 2002
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Roughly actual loss, not just paper.

He owns 80%, I have 20% of top co. The company with losses is wholly owned by top co.

I'm told he's able to merge/amalgamate with this co. to realize on the losses.

Issues being:
a) what is the worth of the sub co
b) if he merges/amalgamates, is this still owned by top co, or is it severed out?

yes, in general i need to talk to an accountant about these matters.

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