Sale of Business vs Sale of Shares: Tax Comparison for Ontario Business Owners

ByManan Patel

Sale of Business vs Sale of Shares: Tax Comparison for Ontario Business Owners

By Bader A. Chowdry, CPA, CA, LPA | Insight Accounting CPA

When it’s time to exit your business in Ontario, one of the most important decisions you’ll face is how to structure the transaction. Should you sell the assets of the business or sell the shares of the corporation? The answer can significantly impact your after-tax proceeds, liability exposure, and deal complexity.

For business owners in Mississauga, Toronto, and across the GTA, understanding the tax implications of asset sales versus share sales is critical to maximizing exit value. At Insight Accounting CPA, we help entrepreneurs navigate these complex decisions with strategic tax planning and deal structuring expertise.

This guide provides a detailed comparison of asset sales and share sales from a tax perspective, including eligibility for the Lifetime Capital Gains Exemption (LCGE), implications for buyers and sellers, and structuring considerations specific to Ontario businesses.

What is an Asset Sale?

In an asset sale, the buyer purchases specific assets of the business—such as inventory, equipment, intellectual property, customer lists, and goodwill—while leaving the corporate shell (and often its liabilities) with the seller.

Common Assets Sold:

  • Tangible assets (equipment, vehicles, inventory, real estate)
  • Intangible assets (patents, trademarks, customer contracts, goodwill)
  • Receivables (with or without recourse)
  • Leasehold improvements

The seller retains ownership of the corporation, which may continue to exist for tax and legal purposes.

What is a Share Sale?

In a share sale, the buyer purchases the shares of the corporation from the shareholder(s). The corporation itself—including all assets, liabilities, contracts, and legal obligations—is transferred to the buyer.

What Transfers in a Share Sale:

  • All corporate assets and liabilities
  • Tax attributes (loss carryforwards, capital dividend account balance)
  • Legal obligations (contracts, leases, employment agreements)
  • Corporate identity and history

The corporation continues to operate under new ownership.

Tax Implications for Sellers: Asset Sale vs Share Sale

Asset Sale – Seller Tax Treatment

In an asset sale, each asset is sold individually, and different tax treatments apply depending on the nature of the asset:

| Asset Type | Tax Treatment |

|————|—————|

| Inventory | Taxed as ordinary income (100% taxable at corporate rates) |

| Depreciable property (equipment, vehicles) | Recaptured CCA taxed as income; gains above UCC may be capital gains (50% taxable) |

| Eligible capital property (goodwill, customer lists) | 50% taxable as capital gains |

| Real estate | Capital gains (50% taxable) or recapture if CCA previously claimed |

| Accounts receivable | Section 22 election can convert ordinary income to capital gains for bad debts |

#### Key Tax Challenges for Sellers in Asset Sales:

  • Recaptured CCA on depreciable assets is fully taxable as income
  • Inventory gains are 100% taxable
  • No LCGE eligibility for asset sales (LCGE only applies to share sales)
  • Tax must be paid at the corporate level, then again at the personal level when funds are extracted via dividend

Double Tax Impact Example:

If $500,000 is received for assets in Ontario:

1. Corporate tax (~26% combined federal/provincial): $130,000

2. Remaining $370,000 distributed as dividend to shareholder (personal tax ~40%): $148,000

3. Total tax: $278,000 (effective rate ~56%)

Share Sale – Seller Tax Treatment

In a share sale, the shareholder sells shares of the corporation and reports a capital gain on their personal tax return.

#### Tax Benefits for Sellers:

  • 50% inclusion rate: Only half the gain is taxable
  • LCGE eligibility: Up to $1,016,836 (2026 indexed amount) may be exempt from tax if the corporation qualifies as a Qualified Small Business Corporation (QSBC)
  • Single level of tax: No corporate tax, then dividend tax—just personal capital gains tax
  • Lower effective tax rate: Often 20-25% instead of 50%+

Example: $1 million share sale with LCGE:

  • Capital gain: $1,000,000
  • LCGE claim: $1,016,836 (full exemption)
  • Taxable income: $0
  • Tax owing: $0

If the gain exceeds LCGE:

  • Excess gain: $500,000 × 50% = $250,000 taxable
  • Personal tax (~50%): $125,000 (effective rate 12.5% on total proceeds)

Key Advantage: Share sales are almost always more tax-efficient for sellers, especially when LCGE is available.

Tax Implications for Buyers: Asset Sale vs Share Sale

Asset Sale – Buyer Tax Treatment

Buyers prefer asset sales because they can:

  • Step up the cost base of assets to fair market value (increasing future CCA deductions)
  • Avoid inheriting liabilities (including unknown or contingent liabilities)
  • Cherry-pick assets (exclude unwanted inventory, real estate, or contracts)
  • Claim full CCA on stepped-up asset values

Tax Benefit Example:

Buyer purchases equipment for $200,000 (original cost was $100,000):

  • New CCA base: $200,000
  • Annual CCA deduction (20% class 8): $40,000/year
  • Tax savings (26% corporate rate): $10,400/year

Share Sale – Buyer Tax Treatment

Buyers are generally less favorable toward share sales because:

  • No step-up in asset cost base (original UCC and ACB remain)
  • Inherit all liabilities (known and unknown, including tax liabilities)
  • No immediate CCA benefit from purchase price
  • Due diligence risk is higher

Exception: Buyers may accept a share sale if:

  • The corporation has valuable tax loss carryforwards
  • There are non-transferable contracts or licenses tied to the corporation
  • The seller offers a significant price discount to offset tax disadvantages

LCGE Eligibility: Qualifying for the Exemption in Ontario

To claim the Lifetime Capital Gains Exemption (LCGE) on a share sale, the corporation must qualify as a Qualified Small Business Corporation (QSBC) under ITA section 110.6.

QSBC Requirements:

#### 1. Active Business Test

At the time of sale, more than 50% of the fair market value of the corporation’s assets must be used in an active business carried on primarily in Canada.

#### 2. 24-Month Holding Period

The shares must have been owned by the seller (or a related person) for at least 24 months before the sale.

#### 3. 90% Test (24-Month Lookback)

Throughout the 24 months before the sale, more than 90% of the assets of the corporation must have been:

  • Used in an active business in Canada, OR
  • Shares or debt of a connected QSBC

#### Common LCGE Pitfalls:

  • Passive investment income (rental properties, marketable securities) exceeds 10% of assets
  • Real estate holdings not used in active business
  • Related party loans or excess cash on balance sheet

Planning Strategy: Purify the corporation 24+ months before sale by:

  • Paying out excess cash as dividends
  • Transferring passive investments to a holding company
  • Ensuring 90%+ of assets are active business assets

Section 22 Election: Converting Receivables Tax Treatment

When selling accounts receivable in an asset sale, a Section 22 election allows:

  • Seller: Deduct bad debts as a business loss (vs. capital loss)
  • Buyer: Deduct reserves for doubtful accounts

Both parties must jointly elect on Form T2022.

Benefit: Converts unfavorable ordinary income treatment into favorable capital gains treatment for uncollectible receivables.

Structuring Strategies: Hybrid Approaches

1. Asset Sale Followed by Wind-Up

Seller sells assets, then winds up the corporation tax-free under ITA 88(1) to distribute proceeds to shareholders without triggering dividend tax.

2. Share Sale with Price Adjustment

Buyer pays a premium for share sale, seller accepts lower price in exchange for LCGE eligibility.

3. Butterfly Reorganization

Split passive and active assets into separate entities before sale to preserve QSBC status for LCGE.

4. Section 85 Rollover

Transfer assets to a new corporation on a tax-deferred basis, then sell shares of the new corporation.

Tax Comparison Table: Asset Sale vs Share Sale

| Feature | Asset Sale | Share Sale |

|———|———–|———–|

| Seller Tax Treatment | Mixed (income + capital gains) | Capital gains only (50% inclusion) |

| LCGE Eligibility | ❌ No | ✅ Yes (if QSBC qualified) |

| Effective Tax Rate (Seller) | 50-60% (double tax) | 12-25% (with LCGE) |

| Buyer CCA Step-Up | ✅ Yes | ❌ No |

| Liability Transfer | ❌ No (buyer avoids liabilities) | ✅ Yes (buyer inherits all liabilities) |

| Complexity | Higher (allocate to each asset class) | Lower (single transaction) |

| Preferred By | Buyers | Sellers |

Why Ontario Business Owners Should Work with a CPA for Exit Planning

Structuring a business sale involves:

  • LCGE planning (purification, holding period verification)
  • Tax modeling (comparing after-tax proceeds under different structures)
  • Buyer negotiations (balancing tax efficiency with deal attractiveness)
  • Due diligence coordination (financial statements, tax compliance verification)
  • Post-sale tax planning (reinvestment strategies, estate planning)

At Insight Accounting CPA in Mississauga, we help business owners across the GTA maximize after-tax proceeds through strategic exit planning, QSBC qualification reviews, and transaction structuring.

Common Mistakes in Business Sale Structuring

1. Failing to Plan 24+ Months in Advance

LCGE requires 24-month holding and 90% active asset test. Last-minute purification often fails.

2. Not Modeling Both Scenarios

Sellers assume share sale is always best, but sometimes asset sale + wind-up can be competitive.

3. Ignoring Buyer Preferences

Insisting on a share sale without offering a price adjustment may kill the deal.

4. Not Documenting Section 22 Elections

Missing the joint election means losing favorable tax treatment on receivables.

5. Leaving Passive Assets in the Corporation

Rental properties, marketable securities, or excess cash can disqualify LCGE eligibility.

FAQs: Asset Sale vs Share Sale Tax

Q1: Can I claim LCGE on an asset sale?

No. LCGE only applies to the sale of shares of a QSBC. Asset sales do not qualify.

Q2: What if my corporation owns both active and passive assets?

You may need to purify the corporation by:

  • Paying out excess cash as dividends
  • Transferring passive assets to a holding company
  • Ensuring 90%+ of FMV is active business assets

This must be done 24 months before sale to preserve LCGE eligibility.

Q3: Can I do a hybrid sale (some assets, some shares)?

Yes, but it’s complex and requires:

  • Separate purchase agreements
  • Allocation of purchase price
  • Coordination of tax elections (e.g., Section 22, Section 85)

This is rare and typically only used in large, multi-entity transactions.

Q4: What if the buyer insists on an asset sale?

You can:

  • Negotiate a higher purchase price to offset your higher tax cost
  • Use a Section 85 rollover to defer tax
  • Structure as asset sale + corporate wind-up (ITA 88(1)) to avoid double tax

Q5: How do I know if my business qualifies as a QSBC?

Work with a CPA to review:

  • Asset composition (active vs. passive)
  • 24-month holding period
  • 90% test compliance for 24 months prior to sale
  • Shareholder eligibility (individual, not corporation)

Internal Links to Related Services

For comprehensive exit planning and business sale structuring:

Explore industry-specific exit planning strategies:

Ready to Structure Your Business Sale for Maximum After-Tax Value?

Whether you’re planning to exit in 6 months or 5 years, strategic tax planning can save hundreds of thousands of dollars in taxes.

Insight Accounting CPA in Mississauga specializes in:

✅ QSBC qualification reviews and corporate purification

✅ LCGE eligibility planning (24-month compliance verification)

✅ Asset vs. share sale tax modeling

✅ Buyer negotiation support and transaction structuring

✅ Post-sale tax planning and wealth management coordination

Our team has helped Ontario business owners across construction, healthcare, technology, and professional services industries maximize their exit proceeds through proactive tax planning.

📞 Call us today at (905) 270-1873 or visit insightscpa.ca to schedule a confidential exit planning consultation.

Let us help you navigate the complexities of business sale structuring and keep more of your hard-earned equity.

About the Author

Bader A. Chowdry, CPA, CA, LPA is the founder of Insight Accounting CPA Professional Corporation, a forward-thinking accounting firm serving high-growth businesses across Mississauga, Toronto, and the Greater Toronto Area. With expertise in tax planning, business exit strategies, and AI-driven financial intelligence, Bader helps entrepreneurs build scalable, tax-efficient businesses and maximize value when it’s time to exit.

Insight Accounting CPA is recognized for its innovative approach to financial advisory, including a patent-pending AI governance framework for financial controls and compliance.

*Disclaimer: This article is for informational purposes only and does not constitute professional tax or legal advice. Business sale structuring involves complex tax and legal considerations unique to each situation. Consult with a qualified CPA and legal advisor before making any decisions regarding the sale of your business.*

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