How are capital gains taxed when I sell my small business or its assets in Ontario?

When you sell a business, the structure of the deal determines the tax treatment. There are two main structures: an asset sale and a share sale.

In an asset sale, each asset of the business is sold individually. Different assets receive different tax treatment — inventory proceeds are fully taxable as business income, proceeds from goodwill and capital assets are capital gains, and proceeds from depreciable assets (like equipment) trigger recapture of any capital cost allowance previously claimed, which is taxed as ordinary income. Asset sales tend to generate a mix of fully taxable income and capital gains.

In a share sale, the owner sells the shares of the corporation rather than its underlying assets. The gain on the shares is a capital gain, and the seller may be eligible for the lifetime capital gains exemption if the shares qualify as qualified small business corporation shares. From the buyer's perspective, share purchases are generally less attractive because they inherit the corporation's tax history, which is why sellers typically demand a premium for a share deal.

Tax planning before a business sale is critical — the choice of structure, the timing of the sale, and pre-closing reorganizations can materially affect the after-tax proceeds.