Selling a Business in Ontario: Share Sale vs Asset Sale Explained

If you own a corporation and have a buyer, one of the first questions is what exactly you are selling: the shares of the company, or the business assets inside it. The two routes can lead to very different tax results for you and very different risks for the buyer.

This article explains the main differences in plain terms. It is a starting point for a conversation with your lawyer and accountant, because recapture, safe income and other issues vary by facts and are not covered here.

What each type of sale means

In a share sale, you sell your shares to the buyer. The company itself stays the same, with its contracts, employees and history, and the buyer becomes its new owner.

In an asset sale, the corporation sells some or all of its property, such as equipment, inventory, goodwill and contracts, and the buyer picks what it wants to take. The corporation is the seller, and you as shareholder are paid only when money comes out of the corporation.

How the tax result differs

In a share sale, an individual seller may be able to use the lifetime capital gains exemption if the shares are qualified small business corporation shares, and the gain is a capital gain taxed at the one-half inclusion rate. The exemption is available to individuals, not to corporations.

In an asset sale by a corporation, the corporation realizes the gains and any recapture, the exemption is not available to the corporation, and the shareholder is taxed again when the proceeds are paid out. That second layer is the main reason sellers often lean toward selling shares.

Why the buyer may push the other way

Buyers often prefer to buy assets because they can choose what they take and leave behind what they do not want. Sellers often prefer share sales for the tax reasons above. This tension is normal and is usually settled through price and the terms of the agreement.

Whichever structure is used, the buyer will usually want warranties about the business. Ontario's basic limitation period is two years from discovery, but a business agreement made on or after October 19, 2006 can vary or exclude it, other than the 15-year ultimate period. That is why agreements often set contractual time limits on warranty claims.

Other rules that depend on the structure

• Shareholder approval and dissent: a sale of all or substantially all of a corporation's property outside the ordinary course needs a special resolution, with a notice that includes the agreement or a summary and a statement of dissent rights. A voting shareholder can dissent and be paid fair value for their shares.
• Employees: in an asset sale, service with you counts as service with the buyer for those the buyer hires, the buyer need not hire anyone, and the protection cannot be contracted out of. It does not apply if the buyer hires the employee more than 13 weeks after the earlier of the employee's last day or the sale.
• GST/HST: in a sale of a business or part of one, the parties can jointly elect on Form GST44 so no GST/HST is payable on the supply, if the buyer acquires all or substantially all of the property needed to carry on the business. Taxable real property sold to a non-registrant and some other items remain taxable.
• Non-compete: the Employment Standards Act exception for sale-of-business non-competes speaks of a sole proprietorship or partnership, so a corporate share seller who stays on may not be clearly covered unless they are an executive as defined. The covenant may instead sit in the share purchase agreement.
• Non-compete payments: an amount received for a restrictive covenant is generally income to the person giving it. If the covenant is given on a sale of shares to preserve the value of what was sold, the buyer and seller can jointly elect to add the amount to the seller's proceeds instead.

Planning traps with holding companies

Some owners first move shares into a holding company. A tax-deferred transfer of property to a corporation for shares is possible by joint election under section 85, and the election is due by the earliest filing deadline of any electing party, with penalties for late elections.

Be careful if you sell your shares to a corporation you do not deal with at arm's length, such as your own holding company, for non-share consideration or higher paid-up capital. Section 84.1 can create a deemed dividend and reduces the adjusted cost base by earlier exemption claims, which limits the exemption in crystallization and internal reorganization planning. This is an area where timing and sequence matter, so get advice before moving anything.

What to do next

• Ask your accountant to compare after-tax results for a share sale and an asset sale.
• Check whether your shares meet the qualifying tests for the capital gains exemption.
• Identify all shareholders and whether any might dissent.
• List employees, leases and contracts the buyer would need to take over.
• Find out whether the buyer would accept a share sale or insists on assets.
• Do not move shares into a holding company before getting advice.

Frequently asked questions