How does the share structure of my Ontario corporation affect a sale of the business?

Whether your Ontario business is sold as a share sale (the buyer purchases the shares of the corporation) or an asset sale (the buyer purchases the underlying assets) has significant implications for both sides of the transaction, and the existing share structure affects how a share sale plays out.

From a seller's perspective, a share sale is often preferred for tax reasons. If you hold shares in a qualifying small business corporation, the gain from selling those shares may be eligible for the lifetime capital gains exemption — a substantial personal tax shelter. The gain is typically taxed as a capital gain, which is more favourable than the treatment in an asset sale.

However, buyers often prefer asset sales because they can choose which assets and liabilities to take on and get a stepped-up tax cost for the acquired assets. Sellers give up the capital gains exemption in an asset deal but sometimes accept a higher price as compensation.

Your share structure matters in a share sale: who owns which shares, whether there are multiple classes, and whether any shares fail to qualify for the capital gains exemption (for example, because the corporation holds too many passive assets) all affect the tax outcome. Cleaning up the share structure before a sale — sometimes called "purifying" the corporation — is often necessary. This is an area where early tax and legal advice pays significant dividends.