Asset Sale or Share Sale: Which Is Better for a Manitoba Seller?

If you own a business in Manitoba and are thinking of selling, one of the first questions is what, exactly, the buyer is buying. They can buy the assets of the business, or they can buy your shares in the company that owns it. The choice changes your tax result, the paperwork, and who carries the risk of the past.

Buyers and sellers often want opposite structures, so this is usually a negotiation, not a formality. This article explains the main differences in plain words so you can have a more useful conversation with your accountant and lawyer before you list the business or sign anything.

This article covers the law of Manitoba.

What the two structures mean

In an asset sale, the company (or you, if you run the business personally) sells equipment, inventory, goodwill and other property to the buyer. The seller keeps the legal entity. Where the sale is a sale in bulk, a buyer who does not obtain the duplicate bulk sale certificate can be liable for the seller's tax debt as at the date of sale. In a share sale, the buyer takes over the shareholders' ownership of the company, so the company carries on as it was, with everything inside it.

Manitoba's bulk sale rules apply to asset sales only. Taxation Division guidance states that a sale of shares or partnership interests is not a sale of business assets that comprises a bulk sale.

• Asset sale: the buyer picks the assets it wants, and the seller deals with the tax and legal steps that follow from selling property.
• Share sale: ownership of the company changes hands and the company's assets stay where they are.
• Partnership interests and amalgamations: a sale of partnership interests is not a sale of business assets that comprises a bulk sale, and corporate amalgamations are not treated as asset sales.

The lifetime capital gains exemption

For many owners, this is the biggest reason to prefer a share sale. The lifetime capital gains exemption can shelter part of the gain when an individual sells qualifying shares. The limit for qualified small business corporation shares was increased to $1.25 million for dispositions on or after June 25, 2024. The exemption is not available just because you own shares. The shares must meet tests, and they are tested over time, so planning well before a sale matters.

An asset sale by the corporation does not give the shareholder the exemption directly. The tax result for the company and for you personally can differ, and a corporation that sells assets still has to get the money out to its shareholders. Your accountant can model both routes.

• The shares were not owned by anyone other than you or related persons throughout the 24 months before the determination time.
• The corporation is a Canadian-controlled private corporation.
• More than half of the value of its assets comes from qualifying assets while the shares were held that way.

Check the current year's limit and the transition rules with your accountant. The transition rules include an additional deduction of $116,582 for dispositions on or after June 25, 2024.

Why buyers and sellers often disagree

A buyer who purchases assets can allocate the price among them. The agreement's reasonable prices for each asset are used for capital cost allowance, and otherwise fair market value is allocated to each asset and to inventory, with the rest going to goodwill in Class 14.1. A share purchase does not change the tax values of the corporation's assets. That is a common reason buyers push for assets.

On GST/HST, the buyer and seller can jointly elect on Form GST44 to pay no GST/HST if the buyer acquires all or substantially all (at least 90%) of the property needed to carry on the business. The election is not available if the seller is a GST/HST registrant and the buyer is not.

Extra steps a seller faces in an asset sale

If you are selling through a company, an asset deal is more than signing a contract. A sale of all or substantially all of a corporation's property outside the ordinary course of business requires shareholder approval. It is adopted when the holders of each class or series entitled to vote approve it by special resolution. A shareholder may dissent and claim the fair value of their shares, subject to the Act and any unanimous shareholder agreement.

You must also apply to the director (Taxation Division) before disposing of property in a bulk sale, for a certificate showing no tax debt or satisfactory arrangements to pay it. You then give one duplicate to the buyer. A buyer who does not get it can be liable for your tax debt as at the date of sale, so expect buyers to insist on it. The Taxation Division issues the certificate with no fee, and your application must include the sale agreement with a breakdown of the price by asset class.

Employees are also affected. For the minimum standards in Divisions 2 to 5, 9 and 10 of Part 2 of the Employment Standards Code, employment is deemed continuous when a business is sold, so service carries over to an asset buyer. That rule does not cover every employment entitlement.

What to do next

• Ask your accountant to compare your after-tax result under both structures, well before you accept an offer.
• Find out whether your shares could meet the exemption tests, and whether anything needs to change in time.
• Read any shareholder agreement for approval, dissent and sale restrictions.
• Confirm your tax filings are current so a bulk sale certificate is not delayed.
• Have a lawyer review the letter of intent before you sign, since it often fixes the structure.

Frequently asked questions