Many Canadian buyers assume that once a transaction is structured as a stock purchase, they have lost any opportunity to obtain the tax benefits associated with an asset acquisition.

In some situations, that assumption is incorrect. We have a tip for Canadians on E-2 and L-1 visas or looking to buy a business in the U.S.

The U.S. tax code contains provisions that may allow a stock acquisition to receive asset-purchase tax treatment through Section 338(h)(10) election.

What Is a Section 338(h)(10) Election?

At a high level, this election allows certain qualifying stock purchases to be treated as asset acquisitions for tax purposes.

In other words:

• Legally, the buyer acquires shares.
• For tax purposes, the transaction is treated more like an asset purchase.

This can potentially create opportunities for additional depreciation and amortization deductions.

Why Buyers Care

The primary benefit is that the buyer may receive a step-up in the tax basis of the acquired assets.

That step-up can create future deductions that would not normally exist in a standard stock purchase.

For a growing business, these deductions can provide meaningful tax savings over time.

Timing Is Critical

One of the biggest mistakes buyers make is learning about this election after the purchase agreement has already been signed.

By that point, options may be limited.

Acquisition structure should be evaluated during negotiations—not after closing.

The tax consequences of a transaction are often determined long before ownership changes hands.

Cross-Border Considerations

For Canadian buyers, there is an additional layer of complexity.

Even if a transaction produces favorable U.S. tax treatment, it is important to understand how the same transaction will be treated in Canada.

Questions that should be evaluated include:

• Will Canada recognize the same tax treatment?
• Are there reporting implications?
• How does the transaction affect future cross-border tax planning?
• Are there treaty considerations?

These questions often require analysis from someone familiar with both tax systems.

Final Thoughts

Section 338(h)(10) is not appropriate for every transaction, but it highlights an important principle:

The legal structure of a deal and the tax treatment of a deal are not always the same thing.

Before acquiring a U.S. business, Canadian buyers should understand what elections and planning opportunities may be available.

A small planning decision before closing can create significant tax benefits after closing.