The Fundamental Choice: Asset Sale vs Share Sale
When you sell a private business in Canada, the transaction structure determines how much of the proceeds you keep after tax. This guide compares the two main structures, works through the tax on each, and covers hybrid sales, earn-outs and the proceeds; it is part of the corporate, trust and estate tax guides.
| Asset Sale | Share Sale | |
|---|---|---|
| What is sold | Specific assets inside the corporation | Shares of the corporation itself |
| Who sells | The corporation | The shareholder(s) personally |
| Tax paid by | Corporation (then shareholder on dividend) | Shareholder personally |
| LCGE available | No | Yes (if QSBC shares) |
| Capital gains treatment | Depends on asset type | Yes, gain on shares is capital |
| Buyer’s preference | Usually preferred | Usually less preferred |
| Seller’s preference | Usually avoided | Usually preferred |
Why Sellers Strongly Prefer Share Sales
1. LCGE Eligibility
A share sale lets each individual shareholder claim the lifetime capital gains exemption on qualified small business corporation shares, which on a significant sale can eliminate $300,000 to $500,000 of personal tax. An asset sale generates income at the corporate level, not a personal capital gain, so the exemption isn’t available; the exemption’s limit and the share tests are on its own page.
2. Single Level of Tax
In a share sale, the shareholder pays capital gains tax (50% inclusion) on the gain from their selling price minus their adjusted cost base. No corporate tax is triggered.
In an asset sale, the corporation pays tax on each asset sold, then the shareholder pays personal tax again to extract remaining proceeds, creating double taxation.
3. Simpler Transaction
Share sales transfer everything in one transaction. Asset sales require itemizing, valuing, and transferring each asset and contract.
Why Buyers Prefer Asset Sales
Buyers inherit all liabilities of a corporation in a share sale, known and unknown. This includes: tax disputes, pending lawsuits, environmental liabilities, warranty claims, employee issues.
In an asset sale, buyers cherry-pick what they want and get a fresh cost base on all purchased assets, allowing more depreciation (CCA) and amortization going forward.
Tax Consequences: Asset Sale Worked Example
Corporation sells:
- Equipment (Class 10): original cost $150,000, UCC $80,000, sold for $120,000
- Customer list/goodwill: sold for $400,000, no tax cost
| Asset | Proceeds | Tax Basis | Gain | Tax Treatment |
|---|---|---|---|---|
| Equipment | $120,000 | $80,000 UCC | $40,000 recapture | 100% income, added to corp income |
| Goodwill | $400,000 | $0 | $400,000 | 50% is capital gain; goes into Class 14.1 |
Corporate tax on proceeds, then personal tax on dividend to extract, can easily exceed 60–70 cents of total tax per dollar of gain.
Tax Consequences: Share Sale with LCGE
Shareholder has 1,000 common shares with ACB of $100 (nominal founder’s investment). Business sold for $2,000,000.
| Item | Amount |
|---|---|
| Sale proceeds | $2,000,000 |
| Less: ACB of shares | ($100) |
| Capital gain | $1,999,900 |
| Less: LCGE claimed | ($1,275,000) |
| Taxable capital gain (50% of $724,900) | $362,450 |
| Ontario personal tax on $362,450 at ~46% | ~$166,727 |
Compare to no LCGE: tax on full $1,999,900 capital gain (50% inclusion) = taxable $999,950 × 46% = ~$459,977. LCGE saves ~$293,250 in this example.
Negotiating Between Asset and Share Sale
Buyers and sellers sometimes split the difference with a Section 85 rollover or a hybrid sale:
Hybrid Sale
The buyer and seller agree that some assets are sold (the asset sale portion, at a higher price to compensate the seller) while the remaining transaction is structured as a share purchase. This gives the buyer a stepped-up cost base on key assets while the seller still accesses partial LCGE.
Section 85 Rollover
Section 85 of the Income Tax Act allows a shareholder to transfer assets to a corporation (or between corporations) at an elected amount between cost and FMV, deferring capital gains. Used in corporate reorganizations before a sale, not typically in the sale itself, but it restructures the pre-sale share structure to optimize LCGE access.
Earn-Out Arrangements
An earn-out ties part of the purchase price to post-sale performance.
- Tax treatment: Earn-out payments received in future years are capital gains in those years
- LCGE: LCGE can be used against earn-out capital gains in the year they are received (if room remains)
- Risk: If the earn-out target isn’t met, the expected proceeds don’t materialize
- Advantage: Buyers accept earn-outs as a valuation bridge; sellers may accept lower guaranteed price but capture upside if business continues to perform
Earn-out structures have specific CRA rules, which is why sellers usually have a tax advisor review the terms.
Post-Sale Investment Planning
After selling a business for $2M+, you likely have a large personal lump sum. Common structure:
| Step | Action |
|---|---|
| 1. Top up TFSA | $109,000+ depending on prior room (2026 cumulative maximum since 2009); tax-free growth |
| 2. RRSP contribution | If you have unused room from prior salary income |
| 3. Pay off home mortgage | Interest saved at the mortgage rate (certain on a fixed rate, not on a variable one) |
| 4. Non-registered investment portfolio | Diversified, low-MER ETFs; tax-efficient asset location |
| 5. Spousal/family trust | If significant remaining capital, for estate planning |
| 6. Emergency fund | Ensure 6–12 months of living expenses in liquid savings |
Many sellers work with a fee-only financial planner and a tax accountant in the year of sale. The combination of LCGE, RRSP deductions, TFSA contributions, and income averaging determines the net tax outcome.