Share sale or asset sale: the tax decision behind every Canadian business sale

1. 2 ways to sell the same company

Every sale of an incorporated Canadian company is 1 of 2 deals. In a share sale, the buyer buys the shares of your corporation from you. In an asset sale, your corporation sells what is inside it to the buyer, and you still own the corporation afterwards. The business the buyer ends up running can look identical either way. The tax, the risk and the paperwork are not.

The guide to how a sale works covers this decision in a section. This guide goes to the bottom of it, because it is where most of the money outside the price is made or lost, and because the biggest part of it has to be set up 2 years before you sell.

2. What moves in a share sale

Everything. The corporation is the same legal person the day after the sale as the day before. It has a new owner, and that is all that has changed. Its contracts, leases, licences, bank accounts, employees, tax history, and every liability it has ever taken on, known or not, come along inside it.

For you, that means 1 transaction: you sell shares, you receive the price, and you report a capital gain on your personal return. For the buyer, it means taking on the corporation’s past. That is why a share purchase agreement runs long on representations, warranties and indemnities, and why part of the price is often held back for a period to cover anything that turns up.

3. What moves in an asset sale

Only what is listed. The buyer and your corporation agree an inventory: the equipment, the stock, the customer list and the goodwill, the name, the contracts the buyer wants, and the lease if the landlord agrees. Everything else stays behind in the corporation, including the liabilities the buyer did not agree to take.

The money lands in the corporation, not with you. The corporation pays tax on what it sold: the gain on the goodwill, and any recapture on equipment sold for more than its written-down value. Then you take the money out, usually as dividends, and pay tax again. Part of it can often come out tax free, because the untaxed half of a capital gain can be paid to you as a capital dividend. But the total bill on an asset sale is usually higher than on a share sale of the same business, and the lifetime exemption described below is not available on it.

The corporation does not disappear. You are left holding a company with cash in it and no business, which is either wound up or kept as a holding company for investments. Both are decisions with tax consequences, and both are your accountant’s.

4. Why sellers want shares: the exemption

The lifetime capital gains exemption is the reason. If the shares you sell are qualified small business corporation shares, each individual shareholder can shelter a lifetime total of capital gains from tax.

• For sales on or after 25 June 2024, and through 2025, the limit is $1,250,000.
• From 2026 the limit is indexed to inflation again, and the CRA’s indexation table puts it at $1,275,000 for 2026.
• Because half of a capital gain is taxable, the CRA states the same figure as a capital gains deduction of $637,500 for 2026.

The increase from the previous limit of $1,016,836 was proposed in the 2024 federal budget and confirmed by the government in March 2025, on the day the proposed increase to the inclusion rate was cancelled. The CRA applies it, and its own pages still describe it as a proposed change, so ask your accountant where the legislation stands when you sell.

The exemption is per person and it is a lifetime total, so anything you used on an earlier sale is gone. It is why sellers who can use it will fight for a share sale, and why owners arrange, years ahead, for more than 1 family member to hold shares, so that more than 1 exemption can be claimed. The guide to family business succession explains the freeze that does it. It is also why an owner who has not checked whether their shares qualify is walking into the negotiation blind.

5. The 3 tests, and the 24 month clock

Qualified is a defined term. In the CRA’s guide to capital gains, the shares have to pass 3 tests.

1. At the time of sale, the company must be a small business corporation: a Canadian-controlled private corporation in which all or substantially all of the assets, by fair market value, are used mainly in an active business carried on primarily in Canada, or are shares or debt of connected companies that meet the same test. The CRA has long read all or substantially all as 90% or more.
2. Throughout the 24 months before the sale, more than 50% of the assets, by fair market value, must have been used that way, and the company must have been a Canadian-controlled private corporation for the whole period.
3. Throughout the same 24 months, nobody other than you, a person related to you, or a partnership you belong to, may have owned the shares.

The tests are where good companies fail. A profitable business piles up cash, investments, sometimes a rental property, inside the operating company, and at the time of sale those are not assets used in an active business. A company with 20% of its value sitting in investments fails the 90% test. Moving those assets out cleanly, which accountants call purification, can take up to 2 years to do without triggering tax on the way, and the 50% test then has to hold for 24 months.

That is the clock. It cannot be started the month a buyer appears, and nothing an advisor does during the sale can wind it back. If a sale is anywhere in your plans, the first appointment is with your accountant about these 3 tests. The buyer readiness scorecard covers the other things a buyer will price, in 2 minutes, and the guide to how long a sale takes sets this clock against the rest of the calendar.

6. Why buyers want assets

For the same money, a buyer is better off buying assets, for 3 reasons.

• Tax cost. The buyer’s tax cost in what they bought is what they paid for it. Equipment and goodwill bought at today’s value can be written off from today’s value, which is worth real money over the years that follow. In a share sale the corporation’s old, lower tax costs carry on.
• Liabilities. The buyer takes only what is on the list. Old tax years, old disputes and the claim nobody knows about yet stay with the corporation, which stays with you.
• Choice. The buyer can leave behind the truck, the bad contract or the second location.

A buyer who wants shares anyway is usually paying for something only a share sale keeps intact: a licence or contract that cannot be assigned, a lease the landlord will not transfer, tax losses inside the corporation, or a set of customer agreements that would otherwise need renegotiating. Those are worth knowing about before the negotiation, because they are your leverage.

7. How the gap gets bridged

When you want shares and the buyer wants assets, the gap is closed with price and paper.

Price. The buyer’s loss of tax cost and your use of the exemption can both be put in dollars, and the deal usually settles somewhere between. Know what the exemption is worth to you before the first meeting, and expect the buyer to know what the tax cost is worth to them.

Paper. A share sale shifts risk to the buyer, so the buyer shifts some back: representations and warranties about the corporation’s past, an indemnity if they turn out to be wrong, a holdback or escrow of part of the price for a year or 2, and sometimes insurance against the representations. The wider the buyer’s diligence, the narrower those tend to be, which is 1 more reason clean records pay.

Structure. Advisors and accountants have hybrid structures that give the seller the exemption on part of the deal and the buyer a higher tax cost on part of it. They are technical, they are sensitive to timing, and they are the reason your accountant and the buyer’s accountant will talk to each other before the lawyers do. It is also 1 reason the choice between a broker and an M&A advisor matters here: an advisor brings your accountant in at the start, not at the end.

8. GST/HST, employees and contracts

3 things follow from the choice that owners rarely think about until a lawyer raises them.

GST/HST. A share sale is not a sale of goods or services, so no GST/HST applies. An asset sale is, and tax would apply to the price of most of what is sold. In general, where the buyer is taking over all or substantially all of what is needed to carry on the business, the 2 sides can jointly elect, on the CRA’s form GST44, to have no GST/HST apply to the sale. It is routine, and it has to be done.

Employees. In a share sale nothing changes for them: the corporation is still their employer. In an asset sale your corporation is no longer running a business, so your employees are let go by it and offered employment by the buyer. Provincial employment standards law generally carries their service across when the buyer keeps them on. In Ontario, for example, the Employment Standards Act, 2000 deems an employee’s employment not to have been terminated when the buyer of a business employs them, and counts their years with you as years with the buyer, provided the buyer hires them within 13 weeks. The question is what happens to anyone who is not kept on, and who pays for it, which belongs in the letter of intent rather than in the final week.

Contracts and leases. In a share sale they stay where they are, unless one has a clause that lets the other party walk away on a change of control, which is worth reading for before a buyer does. In an asset sale every contract, lease and licence the buyer wants has to be assigned, and many need the other party’s consent. Landlords, franchisors and licensing bodies are the usual reasons an asset sale closes late.

9. The tax on what the exemption does not cover

Above the exemption, and on any sale that does not qualify for it, a capital gain is taxed the ordinary way: half of the gain is added to your income for the year and taxed at your marginal rate. A proposal to raise that inclusion rate to two-thirds on larger gains was cancelled on 21 March 2025, before it took effect.

2 other things your accountant will raise. A reserve can spread a gain over several years where part of the price is paid later, which matters for earn-outs and vendor financing. And alternative minimum tax can apply in the year of a large gain, even where the exemption is claimed. Both are ordinary, both are planning, and neither is a reason to do anything except see your accountant early.

10. Where we fit

Sell My Company is a finder, and proudly Canadian. We introduce owners of Canadian companies with $1 million or more in revenue to 1 vetted Canadian M&A advisory firm that has closed deals at their size in their sector. The firm runs the sale and works with your accountant and lawyer on the structure. We do not advise on tax, value your company or take part in the deal.

What we can say is that the owners who do best on this decision made it 2 years early. If you are years away, take the scorecard and see your accountant about the 3 tests. If you are ready to talk, tell us 4 things.