Asset Sale vs Share Sale: Tax Differences for Ontario Business Owners

When you sell an incorporated business, you and the buyer must decide whether the buyer purchases the shares or the assets. The choice affects your tax, the buyer's tax and the paperwork.

Buyers and sellers often want different structures. This article explains the main differences so you can go into negotiations informed.

How the buyer sees it

In a share purchase the buyer buys the corporation itself, and the change in ownership does not change the tax values of the corporation's assets. In an asset purchase the buyer records each asset at its allocated cost, which is why buyers often prefer assets.

In an asset purchase, fixed assets go into capital cost allowance (CCA) classes, goodwill goes into Class 14.1, and inventory is treated as goods for resale in cost of goods sold. The allocation therefore changes the buyer's future deductions.

How the seller sees it

Only one-half of a capital gain is taxable. A taxable capital gain is added to income and taxed at combined federal and Ontario marginal rates. For 2025 the federal rates run from 14.5% to 33%, and Ontario rates from 5.05% to 13.16%. An Ontario surtax can raise the effective rate for higher incomes.

If you sell qualifying small business corporation shares, you may be able to claim the capital gains deduction, up to $1,250,000 of gains for dispositions after June 24, 2024. In an asset sale by the corporation, that personal deduction is generally not the same route, so ask your advisor how it applies.

For shares to qualify, several tests generally apply:

• At the time of sale, the share must be a share of a small business corporation, owned by you, your spouse or common-law partner, or a partnership you belonged to.
• A small business corporation is a Canadian-controlled private corporation in which 90% or more of the fair market value of the assets is used mainly in an active business carried on primarily in Canada, is shares or debts of connected small business corporations, or is a combination of these.
• Throughout the 24 months before the sale, the share must not have been owned by anyone other than you or a person or partnership related to you.
• Throughout those 24 months, more than 50% of the fair market value of the corporation's assets must have been used in an active business or invested in qualifying connected corporations.

Newly issued shares are deemed to have been owned by an unrelated person before they were issued, so the 24-month clock starts when they are issued. This does not apply to shares issued in exchange for other shares, for all or substantially all the assets of an active business, or as a stock dividend.

To claim the deduction you complete Form T657, and if you had investment income or expenses in any year from 1988 to 2025 you must also complete Form T936. A cumulative net investment loss balance, or an allowable business investment loss claimed, can reduce the deduction available. A large gain sheltered by the exemption can also trigger alternative minimum tax, which is calculated on Form T691.

On an asset sale, if the proceeds credited to a CCA class make its undepreciated capital cost negative, the excess is recaptured depreciation and is included in your income in full. Allocating more of the price to depreciable equipment can therefore raise the seller's tax.

If part of the price is payable after the end of the year, you may be able to claim a capital gains reserve, so that at least one-fifth of the gain is taxed each year and the whole gain within five years. A 10-year reserve applies to some sales of qualifying shares to your child who is resident in Canada. No reserve is allowed if you were not resident in Canada, or if the buyer is a corporation you control.

GST/HST and other elections

• A share purchase is generally not subject to GST/HST, while an asset purchase can be, unless the parties elect.
• Form GST44 lets both sides elect that no GST/HST is payable if the buyer acquires all or substantially all (at least 90%) of the property needed to carry on the business and can continue operating it.
• The GST44 election cannot be used if the seller is a GST/HST registrant and the buyer is not, and GST/HST still applies to taxable services and taxable leases or licences.
• Where all or substantially all business property including receivables is sold to a buyer who will continue the business, both may jointly elect under section 22, and their joint statement of the price for receivables binds both.

Price allocation

Where an amount can reasonably be regarded as partly paid for property, services or a restrictive covenant, each part is treated separately. The part attributable to a property is the seller's proceeds and the buyer's cost.

If the agreement sets reasonable prices for individual assets, the CRA uses those. If not, the price is allocated to each asset at fair market value, then to inventory, and the balance to goodwill. The buyer's allocation should match what the seller reported.

For tax purposes, the CRA defines fair market value as the highest price obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, with neither party under compulsion to transact. How these rules apply to your sale depends on your facts, so it is worth confirming with a lawyer or accountant.

What to do next

• Ask your accountant to model the after-tax result of both structures.
• Check whether your shares meet the qualified small business corporation tests.
• Draft the allocation schedule into the agreement.
• Decide early whether a GST44 election is available.
• Have a lawyer review the agreement before you sign.

Frequently asked questions