Asset Sale vs. Share Sale:Key Tax Considerations When Selling a Business

Asset Sale

In an asset sale, the purchaser buys specific assets of the business rather than the shares of the corporation. This structure offers flexibility but can create tax challenges for the seller.

Key Advantages for Purchasers:

1. Flexibility – The buyer can choose which assets to acquire (e.g., equipment, inventory, goodwill) and which to leave behind.
2. Tax Advantages – Purchased assets receive a new “bumped-up” cost base equal to the purchase price. This means the buyer can claim capital cost allowance (CCA) on the full fair market value, rather than the seller’s depreciated cost.
3. Reduced Risk – Since the buyer is not purchasing the corporation itself, they don’t assume its existing debts, liabilities, or potential lawsuits — avoiding any “skeletons in the closet.”

Drawbacks for Sellers:

1. Taxable Gains – Sellers may face significant taxes on recapture income (from depreciated assets) and capital gains on the sale of appreciated assets.
2. Two Layers of Taxation – Once the assets are sold, the corporation pays tax on the gains, and shareholders will pay personal tax again when withdrawing the after-tax proceeds — before the company can be wound up.

Bottom Line:

Purchasers generally prefer asset sales for the tax advantages and lower risk, while sellers often prefer to avoid them due to the higher potential tax burden.

Share Sale

In a share sale, the purchaser buys all (or a portion) of the company’s shares, effectively taking ownership of the corporation and all of its assets and liabilities.

Advantages for Sellers:

1. Simplicity – The entire business can be sold through a single share purchase agreement, often making the transaction less time-consuming and costly.
2. Lifetime Capital Gains Exemption (LCGE) – If the shares qualify, sellers can use their LCGE to shelter up to $1,250,000 (2025 limit) of capital gains from tax.
   • There is also potential to multiply this exemption among family members through joint ownership or a family trust.
3. Favourable Tax Treatment – Even if LCGE doesn’t apply, or the sales price is in excess of the LCGE limit, only 50% of capital gains are included in a taxpayer’s income, which results in a lower tax rate than most other sources of income.

Considerations for Purchasers:

1. No Step-Up in Asset Values – The underlying assets retain their existing depreciated cost base. The buyer cannot claim higher CCA based on fair market value — a notable tax disadvantage.
2. Assumption of Liabilities – The buyer takes on all known and unknown corporate liabilities, which increases their risk exposure.

Tax Pitfall – Alternative Minimum Tax (AMT):

Even when the LCGE fully shelters a gain, sellers may still face AMT. AMT is separate tax that is applied when a taxpayer is deemed to be paying too little tax on their level of income. This is often the case when the LCGE is being claimed, as it can offset as much as $1.25M of income. AMT applied is potentially recoverable over the next seven years — but only if sufficient regular income tax is paid in those years.

Lifetime Capital Gains Exemption (LCGE)

To qualify for the LCGE on a share sale, the following conditions must generally be met:

1. The sale must be of shares in a qualified Canadian-controlled private corporation (CCPC). At the time of sale, at least 90% of the company’s assets must be used in an active business.
2. The shares must have been held by the seller for at least 24 months prior to the sale.
3. Throughout that 24-month period, the corporation must have been a CCPC, and at least 50% of its assets must have been used in active business.
4. Additional restrictions may apply where the sale is to a related party.

Considerations for Purchasers:

1. No Step-Up in Asset Values – The underlying assets retain their existing depreciated cost base. The buyer cannot claim higher CCA based on fair market value — a notable tax disadvantage.
2. Assumption of Liabilities – The buyer takes on all known and unknown corporate liabilities, which increases their risk exposure.

Final Thoughts

The decision between an asset sale and a share sale depends on multiple factors — including tax implications, business risk, and long-term planning goals.

• Buyers – typically prefer asset sales for flexibility and tax efficiency.
• Sellers – often prefer share sales to take advantage of the LCGE and simplify the transaction.

Each situation is unique—structuring a business sale properly can save (or cost) significant amounts in taxes. Consulting with a qualified tax advisor before negotiations begin is essential.