Why Sellers Prefer a Share Sale in British Columbia: The Tax Reasons

If you own a business in British Columbia and a buyer makes an offer, one of the first questions is whether the deal will be a sale of shares or a sale of assets. The price may look the same on paper, but the tax you pay on it can be very different.

That is why buyers and sellers often disagree on structure. Sellers tend to lean toward a share sale for tax reasons, while buyers often have their own reasons to prefer buying assets. This article explains the seller's side in plain terms. It is general information, not tax advice.

This article covers the law of British Columbia.

Why the structure of the deal changes your tax

In a share sale, you as the shareholder sell your shares in the company to the buyer. The company stays the same and simply has a new owner. In an asset sale, the company sells its assets, such as equipment, inventory and goodwill, and the money goes to the company first.

Proceeds from a sale are not all taxed the same way. Some of the price may be a capital gain, and some may be taxed as ordinary income, depending on what is being sold and how it was treated for tax in the past. Who receives the money also matters, because some tax benefits are available only to individuals.

The lifetime capital gains exemption

The biggest reason sellers favour shares is the lifetime capital gains exemption. It is available only to individuals disposing of qualified shares (or farm or fishing property), and it does not apply where a corporation sells its own assets. Asset sales by a corporation do not use the share tests at all.

To qualify, the shares generally have to meet several tests for qualified small business corporation shares. In summary:

• 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 related partnership.
• Throughout the 24 months before the sale, no one other than you or a related person or partnership can have owned the share.
• During those 24 months the company must have been a Canadian-controlled private corporation, with more than 50% of the value of its assets coming from active business assets used mainly in Canada, or from qualifying shares or debt of connected corporations.
• At the time of sale, 90% or more of the asset value must be active business assets or shares or debt of connected small business corporations.

There are limits and exceptions. The deduction is the least of four amounts, so it is not simply a fixed figure you can always claim in full. It is reduced by your cumulative net investment loss, and you may need to complete Form T936 if you have investment income or expenses from 1988 onward. The deduction is also denied where the sale is part of a series of transactions that includes a dividend caught by s. 55(2) of the Income Tax Act, or in which a corporation or partnership acquires property for significantly less than fair market value.

The dollar limit is indexed to inflation, and the CRA has described changes to the limit and to the small business definitions as proposed. Because those figures may have changed, confirm the current amount with a tax professional before relying on any number.

In an asset sale, not everything is a capital gain

When a company sells its assets, the price is split among them, and each piece can be taxed differently. If equipment was written off over the years through capital cost allowance, recapture must be included in income when the undepreciated capital cost balance is negative. That is taxed as ordinary income rather than as a capital gain.

Losses work differently too. A loss on depreciable property is not a capital loss, although a terminal loss may be deductible instead.

For the part that is a true capital gain, only half is taxable, based on the inclusion rate of one-half set out in the CRA guide. An individual then pays graduated BC tax on that taxable amount. For 2026 the provincial rates run from 5.60% on the first $50,363 of taxable income up to 20.50% on income over $265,545. Federal tax is payable as well, so ask an accountant to work out the combined result and to confirm the current inclusion rate.

Getting paid over time, and PST

If the buyer pays you over several years, a capital gains reserve may let you spread the gain instead of reporting it all at once. Most reserves can be claimed over a maximum of four years, so the gain is included over five years. A nine-year period applies in some cases, such as certain transfers to children and some qualifying business transfers.

PST is another difference. In an asset sale, PST applies to taxable assets such as affixed machinery, equipment, computer hardware and supplies, but not to goodwill, inventory, accounts receivable or real property. PST does not apply to the sale of shares of a business.

What to do before you agree on a structure

Tax advice is most useful before you sign a letter of intent, because the structure is hard to change once the terms are set. A buyer may also resist a share sale for their own reasons, so how this applies depends on your situation and is worth confirming with a lawyer and an accountant.

• Ask an accountant to compare your after-tax result under a share sale and an asset sale.
• Have your accountant review whether your shares meet the 24-month and 90% tests.
• Check the current capital gains inclusion rate and exemption limit.
• Ask whether the price should be paid over time and whether a reserve fits.
• Have a lawyer review the purchase agreement before you sign.

Frequently asked questions