Tax Implications of Selling Your Business in Canada

Selling a business is one of the biggest financial decisions an entrepreneur can make. Beyond negotiating the right price, business owners need to carefully consider how the sale will be structured, since taxes can drastically affect how much money you actually keep.

In Canada, sales are typically structured as either an asset sale or a share sale. Each method has its own tax and non-tax implications, and the choice can make a significant difference to your after-tax proceeds. Let’s break down both options and the key considerations you need to know.

Asset Sale vs. Share Sale: The Basics

In an asset sale, the business itself sells its assets to the buyer. These assets can include  tangible property like inventory, equipment, vehicles, computers, and furniture, as well as intangible assets such as goodwill, intellectual property, customer lists, and brand value. In an asset sale, the corporation is the seller. The business entity keeps operating, but its assets have been sold. This is often the case when the business owner wants to keep the corporate shell and/or banking relationships established over years.

In a share sale, the owner of the corporation sells their shares to the buyer. The new owner takes control of the corporation, along with all of its assets and liabilities. Here, the shareholder is the seller, not the corporation. This is often the case when the business owner no longer wants to run the business.

Tax Implications of a Share Sale

From the seller’s perspective, a share sale is usually the more tax-efficient option. One of the main reasons is the Lifetime Capital Gains Exemption (LCGE) that is offered in Canada. If you sell shares of a Qualified Small Business Corporation (QSBC), you may qualify for the LCGE, which allows you to shelter up to $1,250,000 of capital gains (2025 limit) from tax.

To qualify, three tests must be met:

1. You’ve owned the shares for at least 24 months
2. In the 24 months prior to the sale, more than 50% of the company’s assets were used in active business (not passive investments)
3. At the time of sale, at least 90% of the company’s assets are used in active business

If there are multiple shareholders, each one can claim their own LCGE, potentially multiplying the exemption.

Other benefits of share sales are that the business owner would avoid double taxation. With an asset sale, the corporation pays tax first, then shareholders pay tax again when profits are distributed. With a share sale, you generally only pay tax once. Additionally, buyers assume both known and unknown liabilities, freeing the seller from future responsibility.

Tax Implications of an Asset Sale

With an asset sale, the corporation itself sells its assets and recognizes any resulting gains. After paying tax, proceeds can then be distributed to shareholders. The downside is double taxation. The typical process involves the corporation selling assets and paying corporate tax on capital gains and recaptured depreciation. Then, the after-tax proceeds are distributed to shareholders as dividends, which are taxable again at the personal level.

Here is an example of how that would work. Let’s say a corporation sells non-depreciable assets for $200,000 that originally cost $100,000.

With the remaining $75,000, the corporation can distribute $50,000 as a capital dividend, which is tax-free to shareholders. Then, it will distribute the remaining $25,000 as a taxable dividend to the shareholder(s). If they are in the highest tax bracket, that will be about $11,750 in personal taxes.

Unfortunately, in this case the seller keeps significantly less compared to a share sale where LCGE may apply.

Another important factor in calculating taxes during an asset sale is the designation of depreciable versus non-depreciable assets. A depreciable asset, such as equipment, vehicles, or computers can trigger recapture, which occurs when previously claimed depreciation is added back to income and fully taxable. Whereas non-depreciable assets such as goodwill, customer lists, or intellectual property only trigger capital gains tax.

For example, let’s say a company bought $100,000 worth of equipment, and over the businesses life it claimed $30,000 in depreciation. The equipment was later sold for $120,000.

Therefore, the company would pay $12,400 in tax on the sale of equipment based on the depreciation recapture and capital gains tax.

Comparison: Asset Sale vs. Share Sale

Conclusion

Selling a business isn’t just about the price tag; how the sale is structured can make a six-figure difference in your after-tax outcome. Share sales often benefit sellers thanks to the lifetime capital gains exemption, while asset sales can leave more on the table for the CRA.

Before selling, it’s essential to consult with a CPA who can help you plan the sale, maximize available tax exemptions, and avoid pitfalls like double taxation or unexpected recapture. With the right strategy, you’ll keep more of what you’ve worked so hard to build.