The sale of a business, usually operated through a corporation, can be structured as either a share sale or an asset sale, and the two are legally and practically distinct. In a share sale, the vendor sells the corporation’s shares to the purchaser, so that the purchaser acquires control of the corporation’s assets indirectly through share ownership. A sole shareholder selling to a purchaser, for example, effectively transfers ownership of the business while leaving the corporation and its underlying assets untouched. In an asset sale, by contrast, the purchaser and vendor agree on which specific assets of the business will be sold, the purchase price is allocated among those assets, and possession and ownership pass directly to the purchaser, with the corporation’s governance otherwise unaffected. Only a corporation can be sold by way of a share sale, since sole proprietorships and partnerships have no shares to sell. Thus, the type of entity operating the business will sometimes dictate which method is even available.
Where both methods are available, vendors and purchasers often prefer different structures, because the tax consequences of a share sale and an asset sale differ substantially under the Income Tax Act. A vendor may prefer a share sale to access the lifetime capital gains exemption (LCGE), while a purchaser may prefer an asset sale to avoid assuming the corporation’s liabilities and to increase the undepreciated capital cost (UCC) of the assets acquired. Choosing between the two therefore calls for a due diligence review of the target’s assets, liabilities, and corporate governance. This article explains the pros and cons of each method, the GST/HST implications, and other relevant tax planning mechanisms such as the LCGE so that vendors and purchasers can determine which structure, and which terms, best serve their interests in a given transaction.
Because the choice between an asset sale and a share sale can affect the purchase price, the vendor’s after-tax proceeds, the purchaser’s future tax deductions, historical liability exposure, GST/HST obligations, and access to tax planning opportunities such as the lifetime capital gains exemption, the transaction structure should ideally be reviewed before the parties become committed to particular terms. Consulting an experienced Canadian tax lawyer before the transaction is finalized can help identify tax risks, model the consequences of each structure, preserve available planning opportunities, and ensure that the purchase agreement reflects the intended tax treatment
Key Issues: Income Tax and Excise Tax Implications
A key issue in negotiating the sale of a business is that the vendor and purchaser often have different tax preferences. In particular, when choosing to execute the transaction either through a sale and purchase of assets or shares, the difference in tax treatment for the vendor and purchaser means that one will need to make concessions in relation to maximizing their profit or minimizing the purchase price.
From a tax law perspective, vendors will generally prefer to complete the transaction through a share sale. The main reason for this is the preferential tax treatment that shares receive upon disposition. When shares are sold, only one-half of the capital gain that is realized is included in the vendor’s income. Further, the lifetime capital gains exemption may be available to the vendor, which may mitigate any tax liability arising from the disposition of qualified small business corporation (QSBC) shares. The 50% inclusion rate and the LCGE limit referenced throughout this article reflect the law as currently enacted; the capital gains inclusion rate in particular has been the subject of proposed and subsequently deferred legislative changes in recent years, so these figures should be confirmed against the law in force at the time of any transaction.
In contrast, if a corporation sells its assets, some proceeds may be included as ordinary income. Specifically, there may be a recapture of capital cost allowance (CCA) on the sale of depreciable property. Similarly, as part of the transaction, the inventory may be sold and the profit will be fully included as income.
Furthermore, the corporation’s status as a separate legal entity restricts shareholders from maximizing the amount of after-tax income they can receive. If a shareholder sells shares, the shareholder will receive the proceeds of disposition, which will be taxable only to the shareholder. If a corporation sells its assets, the corporation receives the proceeds of disposition. Although the corporate tax rate is lower than the tax rate imposed on individuals, the money that a corporation earns or receives is, in essence, taxed twice. First, the proceeds of disposition are included in the vendor corporation’s income (i.e., on capital or income account). If the corporation wishes to distribute those funds to its shareholders through a dividend, the shareholders will be taxed on the receipt of the dividend as well. While the Canadian tax system seeks to achieve full integration so that there is no disparity between earning income through a corporation and as an individual and to avoid double taxation, in practice, the two layers of tax arising from an asset sale may result in a greater amount of tax being paid. This is because dividends are fully taxable in the hands of a shareholder, and only half of the proceeds of disposition of shares are included in a shareholder’s income as a capital gain. Of course, the analysis of which is the better method in this regard depends on the price at which the assets and shares are sold. It may be the case that an asset sale will result in a lower tax liability for the vendor. However, in general, because of the favourable tax treatment of the disposition of shares, vendors prefer to sell their shares over their assets.
“Vendors are sometimes surprised that selling the assets of their own company can cost more in total tax than selling the shares personally. The company pays tax first, and then the shareholder pays tax again when funds are distributed. The goal achieved by this tax mechanism is not to tax the income twice, but to ensure that the mode of business is not influenced by the tax treatment of income that is earned by a particular entity.” – David J. Rotfleisch, Certified Specialist in Taxation and experienced Canadian Tax lawyer.
Benefit for Purchaser: CCA and Inventory Purchase Price Allocations
Purchasers, on the other hand, will prefer to purchase the assets of the business. In an asset sale, the purchase price can be allocated among the assets being purchased. This is beneficial for making deductions for the capital cost allowance. Specifically, the price paid for an asset becomes that asset’s new cost for tax purposes, which is the capital cost for depreciable property. For example, if Vendor Corp. is selling its business through an asset sale to Purchaser Corp. and part of the assets being purchased is a $20,000 machine that has depreciated over the years, the purchase price that is allocated to the machine can be higher than the depreciated value. Thus, Purchaser Corp. may purchase the machine for $100,000 and have more room to claim CCA deductions than if it were to have purchased the shares of the corporation and inherited the $20,000 undepreciated capital cost (depreciated value after claiming CCA deductions) of the machine.
The reason why this is not ideal for the vendor is that there will be a “recapture” of CCA. Subsection 13(1) of the Income Tax Act contemplates this situation. The purpose of recapture is to address transactions where the vendor may have claimed too much CCA because the price that the asset is being sold for is greater than the undepreciated capital cost. Using the example above, if the allocated purchase price of the machine is $100,000 and the undepreciated capital cost is $20,000, there will be a recapture depending on the original capital cost of the asset. To determine if there is a recapture, the proceeds of disposition are subtracted from the undepreciated capital cost. If the amount is negative, then that negative amount is included in the vendor’s income (as a positive number).
If the original capital cost was $150,000 and the purchase price was $200,000, then there would be a capital gain and a recapture. First, the portion between the undepreciated capital cost and original capital cost is recaptured. So, the $130,000 difference between the original capital cost and the undepreciated capital cost is recaptured as fully taxable income. The amount that is above the original capital cost is included in income as a capital gain. In this case, $50,000 is a capital gain, half of which is included in the income of the vendor. The amount of CCA that may be deducted is based on the class under which the depreciable property falls according to Schedule II, III, IV, V, and VI of the Income Tax Regulations and the example above is simplified.
Therefore, the vendor in an asset sale may realize immediate tax consequences if it is decided to sell the business through an asset sale. The purchase price allocation can be negotiated to reduce any tax liabilities that may occur, but the purchaser ultimately has more of an incentive to have a higher purchase price to claim CCA deductions. Conversely, the vendor will want to sell the asset at a price that is much closer to the undepreciated capital cost so as to avoid any recapture or capital gains.
Similarly, the price allocated to inventory can be beneficial to the purchaser in an asset sale. In an asset sale, the purchase price allocated to inventory can determine the purchaser’s net income in relation to the subsequent sale of that inventory. If the value of inventory held by the vendor is $100,000 and is sold to the purchaser for $100,000 and the cost of the inventory to the vendor was $50,000, the vendor will have a net profit of $50,000, which will be included in income. The purchaser will acquire the inventory for $100,000 and the cost basis to the purchaser will also be $100,000. If the purchaser makes a subsequent sale of the inventory for $130,000, the purchaser will have $30,000 of income. If this was a share sale, then the purchaser would acquire the shares, which have no bearing on the cost of the inventory. Upon selling the inventory, the original cost basis to the vendor is used to compute the amount of profit attributed to the purchaser. Thus, the purchaser’s sale of the inventory for $130,000 will amount to $80,000 in profit which will form part of the purchaser’s income, not the vendor’s income. Hence, the step-up in cost basis of the inventory allows the purchaser to shift some of the tax burden onto the vendor.
However, under s.68, the CRA has the ability to challenge the purchase price allocation of properties that are part of the purchase and sale agreement. The CRA can determine what should be the “reasonable” amount of consideration for that property. In TransAlta Corporation v The Queen, 2012 FCA 20, the Federal Court of Appeal provided guidance as to what the test is under s.68. Specifically, the Court stated that, “an amount can reasonably be regarded as being the consideration for the disposition of a particular property if a reasonable business person, with business considerations in mind, would have allocated that amount to that particular property.” As such, it is not an amount that the CRA considers reasonable. Rather, if, in an ordinary business context between two unrelated parties, the parties would come to the same conclusion as to the price of the property in question, then the price allocated to the property is reasonable. In practice, the purchase price allocation should be commercially supportable, well documented, and consistent with the fair market value because the CRA can challenge allocations that are unreasonable.
GST/HST Implications on the Sale of Assets
In an asset sale, there are GST/HST implications. The rule under s.167(1)(a) of the Excise Tax Act states that when a supply of a business or part of a business is made, the supplier is deemed to have made a separate supply of each property and service that is applicable under the agreement equal to the consideration that was paid. The election generally cannot be made where the supplier is a registrant and the recipient is not a registrant. Where the s.167 conditions are satisfied, and the parties jointly elect, GST/HST generally does not apply to most property and services transferred under the agreement, subject to statutory exceptions. In effect, no GST/HST is payable for the supply of any property or service that is made under the agreement except:
- a taxable supply of a service that will be rendered by the supplier,
- a taxable supply of property by way of lease, license or similar arrangement and
- where the recipient is not a registrant, a taxable supply by way of sale of real property.
In summary, this rule applies when all or part of the assets of a business are sold to another party. Each individual property and service that forms the agreement is considered a separate supply. Each separate supply is subject to GST/HST on the amount stated as consideration in the agreement.
However, the joint election cannot be made when the vendor is a registrant under the Excise Tax Act and the recipient is not. Alternatively, the election is permitted where the transfer is from a registrant to a registrant, a non-registrant to either a registrant or non-registrant, or between non-registrants. Under s.240(1) every person who makes a taxable supply in Canada in the course of a commercial activity is required to be registered except if the person is a small supplier, a supplier of real property otherwise than in the course of a business, or the person is a non-resident who does not carry on any business in Canada. A registrant is someone who is registered or is required to be registered.
In addition, the s.167 election is only available where the purchaser acquires all or substantially all of the property that can reasonably be regarded as necessary for the purchaser to be capable of carrying on the business, or the relevant part of the business, as a business. Where the purchaser acquires only selected assets, rather than all or substantially all of the assets of the business, the election is not available and GST/HST will generally apply to the transaction. Where the election is available and the parties wish to rely on it, the purchaser is responsible for completing and filing Form GST44 with the CRA, generally on or before the day the purchaser is required to file its GST/HST return for the reporting period in which the transaction occurred.
Utilization of Losses After Acquisition
In certain situations, the availability of losses can make an asset or share sale more desirable.
A vendor may prefer to have an asset sale where it has substantial non-capital losses that have accumulated over the years. Non-capital losses can be deducted against any source of income and are highly beneficial to reduce the amount of tax payable in a year. Therefore, the vendor may want to realize all profits and gains from the sale of inventory and other assets and use the available non-capital losses to offset the amount of income that is taxable. Non-capital losses and net capital losses remain with the corporation, which means that purchasing assets does not entail the transfer of losses to the purchaser. Those losses remain available only to the vendor corporation itself, to be used against the business’ future income, if any. This is the flip side of the usual preferences described above: a vendor with substantial losses may in fact prefer an asset sale so that it can use those losses to shelter any gains or profits that are realized, while a purchaser who wants to preserve a target’s existing non-capital losses or other favourable tax attributes for its own future use may prefer a share purchase instead, subject to the acquisition-of-control and loss-streaming restrictions discussed below.
Where a purchaser acquires all of the shares of a corporation, the purchaser will acquire control of the target corporation. An acquisition of control will generally result in a loss restriction event under paragraph 251.2(2)(a) of the Income Tax Act, subject to specific statutory deeming rules and exceptions. This is significant because a loss restriction event can restrict the target corporation’s ability to use losses arising before the acquisition. Control can be acquired in different ways. Generally, control is acquired when a person has a right to elect a majority of the directors of the corporation. For example, if a person owns 50% of the voting shares, or more, of a corporation, that person will have acquired control. Care should also be taken with section 256.1. It is possible to acquire control by receiving shares of a corporation that exceed 75% of the fair market value of all the shares of the corporation. The 75% fair-market-value rule is not a stand-alone alternative to the acquisition-of-control test; it applies only where its statutory conditions, including the relevant anti-avoidance conditions, are satisfied.
Under s.111(4) of the Income Tax Act, net-capital losses expire after the loss restriction event. These are losses that are realized from the disposition of capital property or non-depreciable property. Under s.111(4)(c), the adjusted cost base of these properties with accrued capital losses are reduced to the property’s fair market value. The amount that the adjusted cost base is reduced by is deemed to be a capital loss in the taxation year ending immediately before the loss restriction event (s.111(4)(d)). The corporation is permitted to designate its capital property to be deemed to have been disposed of immediately before the loss restriction event for proceeds up to the fair market value of the property. This can trigger a capital gain and the corporation’s accrued net-capital losses can be used to offset the capital gains. The corporation is also deemed to have reacquired the property at a cost equal to the proceeds of disposition, which means that the adjusted cost base of the properties that were designated under s.111(4)(e) will benefit from an increased adjusted cost base. As such, even though the purchaser is buying the shares of the corporation, the adjusted cost base of the corporation’s capital property may be increased. Effectively, the purchaser will have decreased its tax burden on the subsequent sale of the properties through the vendor’s designations under s.111(4)(e).
Subsection 111(5) deals with non-capital losses on the occurrence of a loss restriction event. Non-capital losses are treated less restrictively than net-capital losses. Specifically, non-capital losses can be “streamed”, which means that the losses may only be carried forward or back through the taxation year ending immediately before an acquisition of control and deducted in computing the income of the corporation from the same business. In other words, the corporation can only carry forward its non-capital losses after a loss restriction event to a tax year after the loss restriction event occurs only if that business is still carried on and the deduction can only be made for income earned from that business. This is called the continuity of business requirement. For instance, if Purchaser Corp. acquires all of the shares of Target Corp., a transportation company, a loss restriction event occurs the moment the shares are acquired. The non-capital losses of Target Corp. cannot be used by Target Corp. in a tax year after the acquisition of control unless Target Corp. continues the same transportation business. Further, Target Corp.’s non-capital losses can only be deducted against Target Corp.’s income from the transportation business and not any unrelated income from other businesses.
In an asset sale, there are no losses from the vendor’s business that can be carried forward as the purchase of an asset does not include the carry forward of losses.
Lifetime Capital Gains Exemption
The LCGE is only available to an individual who disposes of qualified small business corporation (QSBC) shares (or qualified farm or fishing property); it has no application where a corporation sells its own assets. This is one of the central reasons a vendor resists an asset sale. An asset sale forecloses the exemption entirely, because it is the corporation, not the individual shareholder, that realizes the gain on the assets.
Under s.110.6 of the Income Tax Act, an individual can claim the LCGE to shelter capital gains realized on the disposition of QSBC shares, up to a cumulative lifetime limit. For dispositions in 2026, that limit is $1,275,000, up from $1,250,000 in 2025 following the resumption of annual indexation. At the 50% inclusion rate, this shelters up to approximately $637,500 of eligible capital gains for each individual shareholder who qualifies. The capital gains are sheltered, not the gross sale proceeds. The exemption can also be multiplied across family members who each hold qualifying shares directly or through a discretionary family trust. This multiplication is not automatic and it generally requires each family member to directly or beneficially hold shares that independently satisfy the QSBC tests, including the 24-month holding period, and the resulting plan must be reviewed for alternative minimum tax exposure, the tax on split income (TOSI) rules, and the attribution and beneficiary-designation issues that can arise where a family trust holds the shares.
To qualify as QSBC shares, three conditions must be met. First, at the time of sale, at least 90% of the fair market value of the corporation’s assets must be used principally in an active business carried on primarily in Canada. Second, throughout the 24 months preceding the sale, at least 50% of the fair market value of the corporation’s assets must have met that same active-business test. Third, throughout that same 24-month period, the shares must not have been owned by anyone other than the individual or a person related to the individual.
Many private corporations accumulate passive assets, such as excess cash, marketable securities, or an investment portfolio, that erode the 90% and 50% asset tests. A vendor who intends to sell shares and claim the LCGE should undertake a “purification” of the corporation well before a sale is contemplated, typically by removing passive assets through a dividend, an inter-corporate transfer, or a pre-closing reorganization, so that the corporation meets the QSBC tests at the relevant times. Because the 24-month lookback period runs from the date of sale, purification generally needs to begin well in advance of any letter of intent.
As David J. Rotfleisch notes, “clients who wait until they have a signed offer to ask about purification are usually too late. QSBC status is something you plan for years in advance, not weeks. Because the 24-month lookback runs from the date of sale, purification and QSBC planning of this kind need to happen well before a letter of intent is even on the table, not after.”
Corporate Liabilities Continue with the Corporation
The sale of shares comes with a particular burden related to liabilities. Because a share sale transfers ownership of the corporation itself rather than specific assets, the purchaser steps into the corporation exactly as it stands, inheriting every liability the corporation carries, whether known or unknown, disclosed or undisclosed. This includes not only tax liabilities, such as tax arrears, payroll remittances, or CRA reassessment risk for prior taxation years, but also contractual obligations, outstanding litigation and warranty claims, environmental liabilities, pension and employee benefit obligations, and ordinary trade debts. The purchaser does not get to select which liabilities it wants; it acquires the corporation as a whole.
An asset sale is generally more attractive to a purchaser precisely because it allows the purchaser to be selective. The purchase agreement can identify specific assets to be acquired and specific liabilities, if any, to be assumed, leaving most of the vendor corporation’s historical liabilities behind with the vendor. That insulation is not absolute, however. Employees are a common source of continuing exposure even in an asset sale. Several provinces’ employment standards legislation treats a purchaser of a business, rather than merely its assets, as a “successor employer” for length-of-service purposes in certain circumstances. Thus, a purchaser who continues to operate substantially the same business with substantially the same employees may inherit obligations it assumed it had avoided.
A due diligence review cannot predict the future. Financial statements, tax filings, and litigation searches can surface known or reasonably discoverable liabilities, but they cannot guarantee that a reassessment will not arrive after closing, that a former customer will not later allege a defect in a product sold years earlier, or that a regulator will not pursue the business for a historical compliance failure that no one flagged during the review. In practice, this review typically includes searches of corporate records, PPSA and other security registrations, real property title, intellectual property registrations, executions, and bankruptcy or receivership filings against the target, and these searches should be updated again immediately before closing, since a registration or filing made between the initial search and closing can otherwise go unnoticed.
The purchase agreement is where this risk is actually allocated, through representations and warranties, specific indemnities for known or suspected exposures, survival periods that extend beyond closing, often longer for tax matters given the CRA’s extended reassessment periods, holdbacks or escrows that set aside part of the purchase price to satisfy claims that materialize after closing, and, increasingly, representation and warranty insurance that shifts some of that risk to a third-party insurer rather than the vendor personally. A purchaser considering a share sale should expect to negotiate for more robust protection on all of these fronts than it would typically need in an asset sale, precisely because it is assuming the corporation’s full liability history rather than a defined set of assets.
Hybrid Sales: Combining Elements of Both Structures
In some transactions, the vendor and purchaser structure the sale as a hybrid sale, combining elements of an asset sale and a share sale within the same transaction. The purchaser typically acquires specific assets of the target corporation, such as intellectual property or other intangible assets, directly from the corporation, and then separately acquires the remaining shares of the corporation from the vendor. A properly structured hybrid sale can, in principle, let the vendor preserve access to the LCGE on the share component of the proceeds while giving the purchaser a stepped-up cost base on the assets it acquires directly.
However, hybrid sales attract particular scrutiny from the CRA because they can trigger subsection 84(2) of the Income Tax Act, the anti-avoidance rule aimed at inappropriate distributions to shareholders on a business reorganization. In Foix v His Majesty the King, 2023 FCA 38, the Federal Court of Appeal took a broad view of subsection 84(2), finding that funds a purchaser helps channel to shareholders through a hybrid sale can be treated as a fully taxable dividend rather than a capital gain, even where the target corporation did not itself directly distribute the funds. Given this, and the expanded GAAR rules in effect since January 1, 2024, a hybrid sale should only be structured with the involvement of an experienced Canadian tax lawyer from the outset, and well before any letter of intent is signed.
Practical Implications: Structure of the Deal Should Be Negotiated
In practice, the choice of structure is rarely made unilaterally. Vendors generally push for a share sale to access the LCGE and to hand off historical liabilities to the purchaser, while purchasers push for an asset sale to obtain a stepped-up cost base for CCA purposes, avoid inheriting undisclosed liabilities, and choose which specific assets to acquire. Due diligence findings, including the target’s liability profile, whether the shares actually qualify as QSBC shares, and the extent of any unrecorded contingent liabilities, will typically determine which side holds the stronger negotiating position.
Takeaways: Differences in Preference for Vendor and Purchaser
Taken together, these dynamics point to a few practical takeaways:
- A share sale tends to make the most sense where the vendor holds QSBC-eligible shares, the corporation has a clean corporate and litigation history, and the purchaser is comfortable assuming the target’s liabilities, typically subject to negotiated indemnities and representations.
- An asset sale tends to make sense where the purchaser wants only specific assets or business lines, the vendor’s corporation carries meaningful liability or tax risk that the purchaser does not want to inherit, or the LCGE is unavailable because the shares do not, or cannot, meet the QSBC tests.
- Pre-sale reorganizations, such as an estate freeze or a purification of the corporation to meet the QSBC asset tests, can preserve optionality by putting the vendor in a position to pursue either a share sale or an asset sale as the negotiation develops.
Pro Tax Tips: Due Diligence is Necessary and Careful Tax Planning Can Mitigate Unwanted Consequences
Before signing a letter of intent, get professional tax planning advice, since the deal structure becomes far harder, and far more expensive, to change once price and broad terms have been agreed. A letter of intent should not lock in a structure before tax due diligence, the GST/HST treatment of the transaction, the purchase price allocation, the vendor’s LCGE and QSBC status, and the allocation of liabilities have all been considered. It is important to understand not only what tax consequences arise on the sale or purchase of assets or shares of a corporation, but also future implications. If you are a purchaser, a proper due diligence review will be necessary to mitigate any risks of potential tax and civil liability. If you are a vendor, it will be necessary to be informed on your filing obligations, how income should be characterized upon the disposition of certain assets or shares, and how you can minimize your tax burden. In both circumstances, it is recommended to speak with an experienced Canadian tax lawyer to help you better understand the process and to guide you through the different areas where issues can occur.
FAQs: Procedure for Selling a Business, Professional Corporations, and Other Taxes That May Apply
Is a share sale or asset sale better for tax purposes?
Neither structure is universally better. Vendors are usually better off with a share sale because it lets them take advantage of the preferential tax treatment of capital gains. Purchasers are usually better off with an asset sale because it produces a stepped-up cost base for CCA purposes and lets them leave unwanted liabilities behind with the vendor’s corporation. The final structure is typically the product of negotiation rather than a single “better” answer.
Can I still claim the capital gains exemption if I sell company assets instead of shares?
No. The LCGE applies only to an individual’s disposition of QSBC shares, or qualified farm or fishing property. It is not available where a corporation sells its own assets, because in that case the corporation, not the individual, realizes the gain. Similarly, a share is not sold, so an asset used in a business would not ordinarily qualify as a QSBC share. A vendor who wants to preserve access to the LCGE generally needs to insist on a share sale.
What happens to my company’s tax liabilities in an asset sale vs. a share sale?
In a share sale, the purchaser acquires the corporation as it exists, including its historical tax liabilities, reassessment risk, and any other undisclosed obligations, subject to whatever indemnities are negotiated. In an asset sale, the purchaser generally acquires only the specific assets identified in the purchase agreement, and the vendor corporation remains responsible for its own past tax filings and liabilities.
For directors, this does not mean that there will be a complete avoidance of responsibility for certain tax obligations of the corporation. In a share sale, the directors of the corporation are likely to change and the vendor may cease to be a director. Under the Income Tax Act and Excise Tax Act, certain withholding obligations, such as payroll remittances and GST/HST, may follow the director even after he or she resigns and he or she may be held personally liable by the CRA. The limitation period to pursue this director is two years after the date of resignation. The new and current directors will only be personally liable for the current tax obligations of the corporation. In other words, the sale of a business will not result in a delegation of tax liabilities for which the original directors may have been responsible.
How is liability risk allocated in the purchase agreement?
Once the parties have decided whether unknown or undisclosed liabilities will stay with the vendor or pass to the purchaser, the purchase agreement is where that allocation is actually implemented. The main tools are representations and warranties about the target’s affairs, specific indemnities for known or suspected exposures, survival periods that extend beyond closing, often longer for tax matters given the CRA’s extended reassessment periods, holdbacks or escrows that set aside part of the purchase price to satisfy claims that materialize after closing, and, increasingly, representation and warranty insurance that shifts some of that risk to a third-party insurer rather than the vendor personally. A purchaser in a share sale should expect to negotiate more robust protection on all of these fronts than it would typically need in an asset sale, since it is assuming the corporation’s full liability history rather than a defined set of assets.
Does GST/HST apply to the sale of a business?
It can. Under s.167(1)(a) of the Excise Tax Act, a sale of all or part of a business is deemed to involve a separate supply of each property and service transferred, each of which is potentially subject to GST/HST on its allocated consideration. The election is not available where the vendor is a registrant and the purchaser is not a registrant, and it is also only available where the purchaser acquires all or substantially all of the property necessary to carry on the business, or the relevant part of the business. Where the section 167 conditions are otherwise satisfied, the parties may be able to make a joint election to have no GST/HST apply to most of the properties and services supplied, subject to the limited statutory exceptions described above. Where the parties make the election, the purchaser is responsible for completing and filing Form GST44 with the CRA.
Am I a registrant?
A registrant is a person who is registered, or who is required to be registered, to collect and remit GST/HST. Under s.240(1) of the Excise Tax Act, registration is generally mandatory for anyone who makes a taxable supply in Canada in the course of a commercial activity, unless the person qualifies as a small supplier, supplies real property otherwise than in the course of a business, or is a non-resident not carrying on business in Canada.
Some small businesses will qualify as small suppliers. A small supplier has worldwide revenue from taxable supplies equal to or less than $30,000. A small supplier may be a registrant if it chooses to register to collect and remit GST/HST, but it is not required to under the Excise Tax Act.
What is a loss restriction event?
A loss restriction event is a change in control, or a deemed change in control, of a corporation that restricts the corporation’s ability to use its accumulated losses. It occurs, among other circumstances, when a person acquires more than 50% of a corporation’s voting shares, or shares representing more than 75% of the fair market value of all its shares. If control is to be determined by ownership of 75% of all of the shares of the corporation, there are additional requirements that must be met. First, the person or group acquiring the corporation cannot control the target corporation at the time of acquisition. Second, it must be reasonable to conclude that one of the main reasons that purchaser does not control the corporation is to avoid the application of one or more specified provisions. Thus, if the purchaser already controls the corporation through other means, then the deemed acquisition of control under s.256.1(2) and (3) does not apply.
In general, a loss restriction event causes net-capital losses to expire and limits non-capital losses to being deducted only against income from the same business that was carried on before the loss restriction event.
Can a professional corporation, such as a medical, legal, or accounting practice, be sold through a share sale?
Not always. Many regulated professions restrict who may hold voting shares of a professional corporation, typically to other licensed members of the same profession. Where those restrictions apply, an unrelated purchaser cannot simply buy the shares, and the transaction may have to proceed as a sale of the practice’s goodwill, equipment, and client files, structured as an asset sale, even though the vendor would otherwise prefer a share sale to access the LCGE. Vendors in regulated professions should confirm their governing body’s ownership rules well before assuming a share sale is available.
Each province will have its own rules regarding professional corporations and each profession’s requirements will differ. The governing statute, by-laws, regulator rules, and permitted ownership structures should be checked before assuming a share sale is available.
What other taxes might apply?
Another tax that may apply is land transfer tax. If an asset sale includes the transfer of real property to the purchaser, then municipal and/or provincial land transfer tax may apply. For example, if the real property in question is located in Toronto, Ontario, then the municipal land transfer tax and the provincial land transfer tax will apply.
Also, apart from GST/HST considerations there may be applicable provincial sales taxes. Other issues may arise regarding payroll and remittance. Similarly, employment relationships will require a separate review. Different issues may arise in different circumstances as they are dependent on the assets and business being sold.
What is the general process for selling a business, and where does a letter of intent fit in?
Most business sales follow a similar sequence regardless of size. The parties usually start with preliminary discussions, followed by a letter of intent. This is a short document that sets out the proposed price, structure, and key terms, and is generally non-binding except for provisions like confidentiality and exclusivity. Once a letter of intent is signed, the purchaser conducts due diligence, reviewing financial, legal, and tax records, while the parties negotiate and draft the definitive purchase agreement. This is typically when the choice between an asset sale and a share sale, and the tax consequences that follow, get finalized. The transaction then proceeds to closing, sometimes followed by post-closing adjustments or the release of amounts held back in escrow.
Do I have to sell my whole business, or can I sell just part of it?
It depends on the structure. A share sale is generally all-or-nothing for a given corporation, since it involves transferring ownership of the entire legal entity, though a vendor can sell only some of their shares if bringing in a partner or investor rather than exiting completely. It is possible to retain shares of the corporation and effectively transfer the control of the corporation upon the sale of shares. This requires corporate restructuring and may involve creating a new class of shares. An asset sale offers more flexibility: a vendor can sell a single product line, a division, or a specific set of assets while retaining the rest of the business, which is often useful for an owner who wants to wind down gradually or keep part of the operation running.
The issue with selectively selling assets in a business is that the section 167 election for GST/HST exemption is only available if the purchaser acquires ownership, possession, or use of all or substantially all of the property that can be reasonably regarded as being necessrary to carry on the business or part of the business. The term “all or substantially all” is specific and requires the purchaser to receive all or 90% or more of the relevant assets to carry on part or all of the business.
What is a “hybrid sale” of a business?
A hybrid sale combines elements of an asset sale and a share sale in the same transaction: the purchaser acquires specific assets of the target corporation directly and separately acquires the corporation’s remaining shares from the vendor. Vendors and purchasers sometimes prefer this structure because it can let the vendor access the LCGE on the share component while giving the purchaser a stepped-up cost base on the assets acquired directly. However, following the Federal Court of Appeal’s decision in Foix v His Majesty the King, 2023 FCA 38, hybrid sales face significant CRA scrutiny under subsection 84(2) of the Income Tax Act, and should only be structured with experienced Canadian tax lawyer involvement from the outset.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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