When a business is sold, one of the most consequential decisions made early in the process is how the transaction will be structured. This is not a detail to be determined later or delegated entirely to lawyers. It affects the tax consequences for both buyer and seller, the transfer of liabilities, the treatment of existing contracts, the treatment of employees, and in many cases, the difference between millions of dollars in tax paid and millions of dollars kept.
Share Purchase
In a share purchase, the buyer acquires the shares of the corporation directly from the selling owner. The business entity continues to exist unchanged. Contracts, employees, licenses, and liabilities all remain with the corporation. The buyer steps into the position of the owner with the full legal structure of the business intact.
Why sellers typically prefer a share purchase
For most Canadian business owners selling a Qualified Small Business Corporation, the share purchase is significantly more favorable from a tax perspective. The primary reason is access to the Lifetime Capital Gains Exemption. The LCGE allows eligible sellers to shelter up to $1,250,000 in capital gains from tax on the sale of qualifying QSBC shares. The benefit multiplies further with proper advance planning — a business owner who has established a family trust and issued shares to family members can potentially multiply the LCGE across spouses, adult children, and other eligible beneficiaries.
Asset Purchase
In an asset purchase, the seller retains ownership of the shares of the corporation. The buyer acquires only those specific assets and assumes only those specific liabilities identified in the purchase agreement. The buyer typically creates a new legal entity to receive the purchased assets.
Why buyers typically prefer an asset purchase
From a buyer’s perspective, the asset purchase offers greater certainty and control. The buyer knows exactly what they are acquiring and which obligations they are assuming. An asset purchase also allows the buyer to record acquired assets at their current fair market value rather than their historical cost — generating increased Capital Cost Allowance deductions going forward.
The seller’s tax burden in an asset sale
From the seller’s perspective, an asset sale within a corporation creates a more complex and often more costly tax outcome. Recaptured Capital Cost Allowance on depreciable property is taxed as business income. Capital gains on non-depreciable assets are taxed at the capital gains inclusion rate. After the corporation realizes this taxable income, the selling owner must then extract the after-tax proceeds personally — creating the risk of effective double taxation that sellers consistently seek to avoid. Critically, the LCGE is not available in an asset sale. This alone can represent hundreds of thousands of dollars in additional tax.
The Negotiation Reality
Because what is favorable to one party is typically unfavorable to the other, deal structure is almost always a negotiating point. Buyers push for asset purchases to limit liability exposure and gain tax advantages through asset step-up. Sellers push for share purchases to access capital gains treatment, the LCGE, and a cleaner exit. When both parties have incompatible preferences, other terms are often adjusted to bridge the gap — a buyer who insists on an asset structure may offer a higher purchase price to compensate the seller for the additional tax cost.
Key Canadian Tax Considerations
Lifetime Capital Gains Exemption
The LCGE is $1,250,000 for qualifying QSBC shares sold after June 25, 2024, and is indexed to inflation going forward. To qualify, the corporation must be a Canadian-controlled private corporation, at least 90% of the fair market value of its assets must be used in an active Canadian business at the time of sale, and more than 50% of its assets must have been used in active business operations throughout the 24 months immediately before the sale. These conditions are technical and unforgiving — assets held inside the corporation that are not used in active business can disqualify shares from LCGE eligibility at the moment they matter most.
Canadian Entrepreneurs Incentive
Beginning in 2025, the CEI provides an additional $2,000,000 of capital gains eligible for the reduced 33.33% inclusion rate for qualifying founders. The CEI is phased in over five years, adding $400,000 per year to the eligible amount. Like the LCGE, it applies only to share sales and has specific eligibility conditions. Notably, certain industries are excluded from the CEI entirely, including professional corporations, financial services, insurance, food and accommodation, arts, recreation, and personal care services.
Capital gains inclusion rate changes
Since June 25, 2024, capital gains above $250,000 in a given year are subject to a 66.67% inclusion rate rather than the previous 50% rate. The first $250,000 of annual capital gains for individuals continues to use the 50% inclusion rate. This change affects both share sales and asset sales, though the LCGE and CEI still provide meaningful relief on qualifying share sales that are not available in asset transactions.
GST/HST considerations
Asset sales are generally subject to GST/HST on the transfer of assets. Share sales are not. However, buyers and sellers can jointly file a Section 167 election under the Excise Tax Act to exempt the transfer of a business’s assets from GST/HST where certain conditions are met.
The Importance of Early Structuring
The decisions that determine how much of your business value you actually keep are not made at the closing table. They are made in the years leading up to the transaction. A corporation that holds passive assets, has shares owned by the wrong entity, or has never established the holding company and trust structure that would allow LCGE multiplication, may find itself unable to access the most valuable Canadian tax tools at the moment they matter most. Both parties should consult their professional advisors at the earliest possible stage — sellers who engage their tax and legal advisors before entering negotiations are almost always better positioned than those who address structure after an offer has been tabled.
It is not what you get. It is what you keep.
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