Should I sell the assets of my business or the shares?

Why sellers usually prefer shares

Selling shares means selling an asset you personally own, taxed as a capital gain. Shares of a qualifying small business corporation may be eligible for the lifetime capital gains exemption under s. 110.6 of the Income Tax Act, which shelters part of the gain from tax; the amount is indexed and changes each year, so check the current figure and your eligibility with your accountant rather than assuming it applies. An asset sale, by contrast, is taxed inside the corporation first, and again when you eventually take the proceeds out personally, which usually leaves less in your hands from the same price.

Why buyers often want assets, and what that costs you

Buyers frequently prefer assets because they choose what they take on, leave most liabilities behind, and get a fresh tax cost for what they buy. That preference is a negotiating point, not a requirement; some buyers accept a share deal for the right price, backed by strong representations, warranties and a holdback. Where the deal is genuinely undecided, the structure often ends up settled by price: you may accept less for shares, or the buyer may pay more for assets.

Get comparative tax advice on both structures before the letter of intent fixes one.

Price allocation and the HST election

In an asset sale, the price has to be allocated among the assets, and s. 68 of the Income Tax Act lets the Canada Revenue Agency substitute a reasonable allocation if the parties' split looks unreasonable. You will usually want more value attributed to goodwill or shares and less to depreciable equipment than the buyer does; settle it in the agreement, with your accountant involved, and use the price allocation tool below to see how the pieces interact.

Under s. 167 of the Excise Tax Act, a joint election with the buyer can remove HST from the sale where the buyer acquires all or substantially all of what is needed to carry on the business. Both sides must sign and the buyer files it with its HST return.

Holdbacks, warranties and what you are still on the hook for

Whichever structure you choose, expect the buyer to want representations and warranties about the business, backed by an indemnity if one turns out to be wrong, and often a holdback of part of the price in a lawyer's trust account for a set period. In a share sale these terms carry more weight, since the buyer is inheriting the corporation's full history along with its contracts and lease.

Negotiate the survival period, a cap on your total exposure and a basket below which small claims are ignored; these numbers matter as much as the headline price.