Share Sale vs Asset Sale: How Seller Tax Differs in Ontario

If you own an Ontario corporation and a buyer wants to purchase your business, one of the first questions is whether you will sell your shares or the corporation will sell its assets. The buyer often prefers assets. You may prefer shares. The difference can change how much of the price you actually keep.

This article explains the main tax differences in plain terms. It is general information, not advice for your situation. Tax outcomes depend on your facts, so the structure should be reviewed by a lawyer and an accountant before you agree to anything.

Who is actually selling?

In a share sale, you (the shareholder) sell your shares to the buyer. The corporation carries on as it was, with the same contracts, history and debts, and a new owner. In an asset sale, the corporation itself sells some or all of its assets, such as equipment, inventory and goodwill, and the money goes to the corporation, not to you.

That one difference explains most of the tax gap. In a share sale, you are the taxpayer on the gain. In an asset sale, the corporation is the first taxpayer, and you are taxed again only when money comes out to you.

Share sale: the lifetime capital gains exemption

If you sell shares, the gain is a capital gain, and only one-half of it is a taxable capital gain. On top of that, you may be able to claim the lifetime capital gains exemption (LCGE) if the shares are qualified small business corporation shares. For a 2025 disposition, the LCGE is $1,250,000, and the matching deduction limit is $625,000. The amount can change over time, so confirm the current figure before you rely on it.

The exemption is a deduction for individuals who sell qualifying shares, and it is claimed on Form T657. It is available only to an individual who was resident in Canada throughout the year. If you were resident for only part of the year, you are treated as resident throughout the year if you were resident throughout the preceding or the following taxation year.

The shares must meet several tests. These are the main ones:

• At the time of sale, the shares must be shares of a small business corporation owned by you, your spouse or common-law partner, or a partnership related to you.
• For the 24 months before the sale, nobody other than you or a related person or partnership can have owned the shares.
• During that holding period, the corporation must have been a Canadian-controlled private corporation with more than 50% of the fair market value of its assets attributable to active business assets or to qualifying shares or debt.

Companies that hold large amounts of cash, investments or non-business property can fail these tests. Cleaning up the corporation before a sale (often called purifying) is a planning step that needs professional help and enough lead time.

Asset sale: two levels of tax

A corporation that sells its own business assets cannot claim the LCGE. Instead, the corporation pays corporate tax on the sale. The federal net general corporate rate is 15%, and a separate federal small business rate of 9% applies to Canadian-controlled private corporations claiming the small business deduction, which has a business limit of $500,000. Which rate applies to any part of the sale depends on the corporation's own facts, so confirm it with your accountant. Ontario's corporate rates are 11.5% (higher rate) and 2.2% (lower small business rate), and the lower rate was reduced from 3.2% effective July 1, 2026. Because the lower rate changed on that date, older figures you may have seen can be out of date, so ask your accountant which rate applies to your tax year.

After that, money paid out of the corporation to you is taxed again in your hands. This is the double taxation that makes asset sales costly for many sellers.

Not every dollar is a capital gain either. If the corporation sells depreciable assets for more than their undepreciated capital cost, the negative balance at year end is included in the corporation's income as recaptured depreciation, and it is taxed as income, not as a half-taxable capital gain.

Allocation, non-competes and other traps

In an asset deal, the price is divided among the assets. Where an amount can reasonably be regarded as paid partly for property, partly for services, or for a restrictive covenant, each part is treated as consideration for that item, whatever the contract says. Any part of the price reasonably regarded as paid for a non-compete is treated as an amount you received for that covenant. The allocation affects both your tax and the buyer's cost base, so it is negotiated carefully.

Be careful with share sales to your own holding company or another related corporation. An individual resident in Canada who sells shares to a corporation they do not deal with at arm's length can be deemed to receive a dividend instead of a capital gain, if the two corporations are connected afterwards, and the LCGE then may not apply to that amount. There is an exception for sales to a corporation controlled by your children aged 18 or older, but the child must take control and stay actively engaged for 36 months (immediate transfer) or 60 months (gradual transfer), and you must make a joint election by the filing-due date.

Side-by-side and next steps

Before you accept a letter of intent, take these steps:

• Ask your accountant whether your shares are likely to qualify for the LCGE, and how the 24-month and 50% tests apply.
• Confirm your residency history for the year of sale.
• List the assets and their tax values so you can see where recapture could arise.
• Have a lawyer review any price allocation and non-compete wording.
• Compare the after-tax result of each structure, not just the headline price.

Frequently asked questions