It may be advantageous for a US purchaser to acquire IP in a hybrid transaction

Where the principal asset of a Canadian start-up company is its intellectual property, it may be possible to use a hybrid transaction to reconcile a US acquiror’s desire to acquire such IP in an asset acquisition with the Canadian individual owners’ desire to sell shares.

• The Canadian target’s shareholders and the US acquiror enter into a share purchase agreement, resulting in the target losing its CCPC status and having a deemed year-end.
• The target transfers all its business to a wholly-owned Newco on a s. 85(1) rollover basis, except that the elected amount for the IP is its fair market value, thereby resulting in a capital gain that bears an effective tax rate of around 13.5% - and in an addition to the target’s capital dividend account (“CDA”), given inter alia that s. 251(5)(b) does not apply for the purposes of determining whether a corporation is a “private corporation.”
• The target increases the stated capital of its shares which, with the use of its CDA, permits the shares to be sold for their stepped-up adjusted cost base.

Where there is no significant recapture respecting the IP, the shareholders’ after-tax proceeds will approximate (and may exceed, where the target had non-capital losses) the after-tax proceeds that would have been realized on a plain vanilla share sale.

Neal Armstrong Summary of Kenneth Saddington and Jennifer Hanna, “Mergers and Acquisitions in the Light of the US Tax Changes,” 2018 Conference Report (Canadian Tax Foundation), 19:1-36 under s. 249(3.1).