What is the difference between an asset sale and a share sale?

In an asset sale, the buyer purchases specific assets (equipment, inventory, goodwill, customer lists) from your corporation. In a share sale, the buyer purchases your shares in the corporation and inherits all its assets and liabilities. Sellers generally prefer share sales (LCGE eligibility, capital gains treatment, one transaction). Buyers often prefer asset sales (step-up in cost base on assets, avoid inheriting unknown liabilities).

Who prefers a share sale — buyer or seller?

Sellers almost always prefer a share sale because: (1) capital gains from share sales may qualify for the LCGE ($1,250,000 tax-free), (2) the entire gain is a capital gain (50% inclusion rate), and (3) it's one clean transaction. Buyers typically prefer asset sales because they get a fresh cost base on assets (more CCA going forward) and don't inherit unknown corporate liabilities.

How is goodwill taxed in an asset sale?

In an asset sale, goodwill is classified as an eligible capital property (now Class 14.1 under CCA). The proceeds reduce the cumulative eligible capital (CEC) pool, and only half of any gain above the pool balance is included in income (technically treated as a capital gain). The SBD generally doesn't apply. It's complex — your accountant should model the full allocation of purchase price.

What is an earn-out in a business sale?

An earn-out is a portion of the purchase price that is contingent on future performance of the business after closing. For example, the buyer pays $2M at closing and an additional $500K if the business hits certain revenue targets in the next two years. Earn-out payments received in future years are treated as capital gains in those years — which can delay LCGE use and spread tax.

How should I invest the proceeds after selling my business?

After a business sale, you may receive a large lump sum personally (after LCGE) or corporately (if asset sale proceeds sit in the corporation). Key considerations: TFSA top-up, RRSP contributions, paying off mortgage, diversified investment portfolio, and tax-efficient drawdown over retirement years. An investment advisor combined with a tax advisor is typically needed for amounts over $1M.

Selling Your Business in Canada: Asset Sale vs Share Sale, LCGE, and Tax Planning (2026)

When you sell a private business in Canada, the transaction structure determines how much of the proceeds you keep after tax. There are two main structures:

	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

1. LCGE Eligibility

A share sale allows the individual shareholder to claim the Lifetime Capital Gains Exemption — up to $1,250,000 per individual (2026) in tax-free capital gains. On a significant business sale, this can eliminate $300,000–$500,000 in personal tax.

An asset sale generates income at the corporate level, not a personal capital gain — the LCGE is unavailable.

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.

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	($1,250,000)
Taxable capital gain (50% of $749,900)	$374,950
Ontario personal tax on $374,950 at ~46%	~$172,477

Compare to no LCGE: tax on full $1,999,900 capital gain (50% inclusion) = taxable $999,950 × 46% = ~$459,977. LCGE saves ~$287,500 in this example.

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 (asset sale portion — for 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. Consult a tax advisor before agreeing to earn-out 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	$95,000+ depending on prior room — tax-free growth priority
2. RRSP contribution	If you have unused room from prior salary income
3. Pay off home mortgage	Risk-free guaranteed return equal to mortgage rate
4. Non-registered investment portfolio	Diversified, low-MER ETFs; tax-efficient asset location
5. Spousal/family trust	If significant remaining capital — estate planning
6. Emergency fund	Ensure 6–12 months of living expenses in liquid savings

Work with a fee-only financial planner and tax accountant in the year of sale. The combination of LCGE, RRSP deductions, TFSA contributions, and income averaging determines the net tax outcome.