Selling Your Business in Canada: Shares or Assets

Should I sell shares or assets?

The tax follows what the buyer acquires. In a share sale, you sell your ownership in the corporation; in an asset sale, the corporation sells property and still exists afterward. The purchase agreement must say which transaction is happening. CRA: Selling a business

Compare each offer using after-tax proceeds in the owner's hands, the buyer's price and asset allocation, and any later distribution from an asset sale. CRA: Buying a business See How corporations are taxed for dividend taxation; compare retaining proceeds in a holding or investment corporation.

If the buyer acquires control in a share sale, the corporation has a deemed year-end immediately before closing and must file a short-year T2 within six months. Pre-sale net capital losses are generally lost, other losses face restrictions, and accrued asset losses can reduce tax costs. Income Tax Act, sections 251.2, 249 and 111; CRA: T2 filing deadline

How is a share sale taxed?

An individual generally has a capital gain equal to the share sale proceeds minus the shares' adjusted cost base and selling costs. Under section 38 of the Income Tax Act, 50% of a capital gain is included in taxable income. Report the sale on Schedule 3; qualified small business corporation shares have their own line. CRA: Capital Gains

A taxable share gain also enters the applicable provincial or territorial tax calculation; deductions and the rest of the return determine tax payable. Quebec residents report the gain on their separate provincial return and may claim a provincial capital gains deduction if eligible. CRA: Provincial and territorial tax; Revenu Québec: Capital gains and deduction

Check the share register, original subscription and later share transactions before calculating cost. A shareholder loan repayment or employment payment may have a different tax character from the share price. A payment for a non-compete promise is generally fully included in income under section 56.4. To add it to share proceeds instead, the seller and buyer must qualify and elect jointly by filing a signed letter with the covenant by the seller's filing due date for the year it was granted. CRA: Restrictive-covenant election

What is the lifetime capital gains exemption, and how much is it?

The lifetime capital gains exemption can offset a qualifying individual's capital gain on qualified small business corporation shares. It is claimed as a capital gains deduction on line 25400, calculated with Form T657; it does not apply to a corporation's asset sale. CRA: Line 25400

The current-year limit is $1.275 million. The increase was enacted and indexation resumed this year. Confirm the applicable limit and remaining lifetime room before signing a return or setting a sale price. Budget 2025 Implementation Act; Finance Canada: 2026 exemption limit

The exemption belongs to the individual, subject to their remaining lifetime room and the year's deduction limits. To claim the deduction, you generally must be resident in Canada throughout the claim year. A part-year resident can qualify if resident at some point that year and throughout the preceding or following year. Form T657 calculates the claim, and Form T936 tracks investment income and expenses for the cumulative net investment loss calculation. CRA: Form T657; section 110.6

Do my shares qualify as qualified small business corporation shares?

Three tests must be checked: the corporation's assets at sale, its assets during the preceding 24 months, and who owned the shares during those 24 months. A trading name or a small-business tax rate alone does not establish qualification. Section 110.6; CRA: Capital Gains, T4037

Asset tests use fair market value, not balance-sheet cost, and must be tracked through time. Cash needed in the business may require a different analysis from surplus cash; investment portfolios and rental assets can cause failure. Connected-company interests have their own conditions. Section 110.6; section 248

What is purification before a sale?

Purification means changing a corporation's asset mix so its shares meet the active-asset test at closing. A corporation with surplus investments or cash may need to transfer or distribute them, but the method itself can create tax or change the purchase price. Test the share qualification rules before moving anything.

Purification at closing may fix the sale-date test; it does not erase a failure of the preceding 24-month test. Prepare fair-market-value snapshots for that period and separate operating assets, surplus assets and connected-company holdings. A proposed transfer to a holding company needs its own tax review; see Holding and investment corporations.

What can shrink or block the exemption?

Qualified shares alone do not guarantee a full deduction. Prior claims, capital losses, allowable business investment losses and a cumulative net investment loss can reduce what an individual may claim. The deduction can be denied if CRA establishes that the seller knowingly or through gross negligence failed to report the gain or filed the return more than a year after its due date. Form T657 and, where relevant, Form T936 determine the amount. Section 110.6; CRA: Capital Gains, T4037

The exemption may remove regular tax on a qualifying gain but still leave alternative minimum tax payable in the sale year. Form T691 calculates this separate tax, which counts 30% of a fully sheltered gain under section 127.52. Some minimum tax paid may be credited against regular tax in later years if the carryover rules are met. CRA: Minimum tax; CRA: Minimum tax carryover

If several shareholders are selling, check each person's share ownership, gain and lifetime deduction history separately. If a family trust owns the shares, its allocation rules and each beneficiary's claim need review. A sale to your own corporation can trigger the non-arm's-length rule discussed below.

How is an asset sale taxed inside the corporation?

The corporation reports the sale asset by asset. Inventory generally produces business income; depreciable property may produce recaptured capital cost allowance and a separate capital gain; non-depreciable capital property may produce a capital gain. A positive undepreciated balance in a class can instead be a terminal loss if no property remains in that class at year-end. CRA: Selling a business; CRA: Capital Gains, T4037

Recapture is added to income, while only 50% of a capital gain is generally taxable under section 38. Taking sale proceeds out of the corporation may create a separate personal tax result; see How corporations are taxed for taxable and capital dividends.

How is the price split among the assets?

The agreement should allocate a supportable price to each asset class because the corporation's income depends on that allocation. Section 68 can override the contract's wording when a payment reasonably relates to particular property or services; section 56.4 governs non-compete promises. A qualifying goodwill payment can retain goodwill treatment under a section 56.4 election by the seller, jointly with the buyer if the payment relates to the buyer's business carried on in Canada, by the seller's filing due date for the covenant year.

Get the buyer's proposed allocation, asset list, original costs and undepreciated capital cost by class before agreeing to a single headline price. See Capital cost allowance for how the depreciation classes work.

Is GST/HST charged when I sell the business?

A share sale generally does not trigger GST/HST on the shares because share transfers are generally exempt financial services. CRA: General information for GST/HST registrants An asset sale may be taxable, but a seller and buyer can jointly elect to have no GST/HST payable on a qualifying sale of the whole business or a division able to operate on its own. Under the agreement, the buyer must obtain ownership, possession or use of property representing at least 90% of the fair market value of everything reasonably needed to carry it on; isolated assets do not qualify. CRA: Selling a business; CRA: GST/HST memorandum 14-4

The election is made jointly on Form GST44. If the purchaser is a registrant, it files the form by the due date of the first GST/HST return for a period in which tax would otherwise have been payable. If neither party is registered, the buyer keeps the signed form. A registrant seller cannot elect with an unregistered buyer. Tax can still apply to taxable services, leases and certain real property sold to an unregistered buyer. CRA: Form GST44; Excise Tax Act, section 167

In Quebec, the parties can use Form FP-2044-V for a joint GST/HST and QST election on a qualifying business sale, subject to Revenu Québec's conditions. Other provincial sales taxes need a separate review where assets are located.

Can I spread the tax if the buyer pays over several years?

An individual who sells shares and is owed part of the price may claim a capital gains reserve, spreading recognition of the gain as permitted by the rules. The general maximum is a four-year reserve, so the full gain is included over five years. Claim it on Form T2017 and bring each prior reserve into the next year's calculation. CRA: Claiming a capital gains reserve

If the corporation sells assets for later payment, a capital gains reserve may defer part of an unpaid gain on capital property. Inventory profit and recaptured capital cost allowance do not become capital gains; calculate the corporation's tax cash needs before accepting instalments. Income Tax Act, section 40

A longer reserve can apply to certain transfers to children and qualifying employee ownership transfers. A reserve is generally unavailable if you sell to a corporation you control, or if the residence conditions fail. An earnout tied to future performance needs separate analysis because its amount and tax character may not be fixed at closing. CRA: Claiming a capital gains reserve

What changes if I sell to my children or employees?

If you sell shares directly to a child, the usual share-sale rules apply. A below-market family price can still be treated as fair-market-value proceeds for you, so get a supportable valuation. A longer reserve may apply to a direct sale of qualified shares to a child resident in Canada. Income Tax Act, sections 69 and 40

A sale to a corporation controlled by your adult child is subject to special intergenerational-transfer conditions. Without relief, section 84.1 can deem some proceeds to be a dividend rather than a capital gain when an individual sells shares to a non-arm's-length corporation. The immediate and gradual transfer routes require the child to acquire and retain the required control and take over the business under detailed conditions. The seller and child must jointly elect on Form T2066 by the seller's filing due date for the sale year. Review the plan before signing. CRA: Form T2066

If employees buy your shares directly, start with the ordinary share-sale and qualified-share rules. A separate deduction may apply only when shares are sold to a qualifying employee ownership trust, a corporation fully owned by that trust, or a qualifying worker cooperative. The company and relevant affiliates cannot be professional corporations; the adult seller or their spouse must have been actively involved for a 24-month period. The trust or cooperative also has Canadian-residency tests for its beneficiaries or workers. A disqualifying event within 24 months of the sale reverses the deduction. Income Tax Act, sections 110.61 and 110.62

The joint election allocates up to $10,000,000 of eligible gains across sellers in one transfer, subject to each seller's limits. File Form T24EOT by the trust's filing due date, or Form T25QCC by the earlier of the seller's and cooperative's filing due dates. Then calculate line 25395 on Form T2048; claim a trust-transfer deduction before a cooperative deduction, and line 25395 before line 25400 for the same sale. CRA: Forms T24EOT, T25QCC and T2048

Example

Illustrative Canadian-dollar figures only; no final tax is calculated. A shareholder paid C$100,000 for all the shares of a Canadian operating company. An unrelated buyer offers C$1,100,000 for the shares, with C$20,000 of selling costs. The shareholder's gain is C$980,000. If the shares meet the ownership and asset tests, the shareholder may be able to claim a capital gains deduction, subject to their remaining room and other limits.

Alternatively, the buyer pays the corporation C$1,100,000: C$200,000 for inventory, C$300,000 for equipment and C$600,000 for goodwill. Assume inventory tax cost of C$120,000; equipment original cost of C$250,000 and undepreciated class balance of C$100,000; and company-created goodwill with no tax cost or other Class 14.1 balance. The corporation has C$80,000 of inventory profit, C$150,000 of depreciation recapture and C$650,000 of capital gains: C$50,000 on equipment and C$600,000 on goodwill. These are before other adjustments. The share exemption does not offset the corporation's amounts. Corporate tax and any later distribution to the owner need separate calculations. CRA: Depreciable property

Different for you?

• You plan to invest proceeds inside a corporation: see Holding and investment corporations.
• You need to work out dividends after an asset sale: see How corporations are taxed.
• You are moving a sole proprietorship into a corporation before selling: see Moving a business into a corporation.
• You are a US citizen who owns the Canadian company: see American owners of Canadian corporations.
• You are a non-resident selling shares whose value comes from Canadian real estate: see Non-residents selling Canadian property.
• You are selling rental property rather than an operating business: see Selling a rental property.
• The deal involves purification, an earnout, a non-compete promise, several shareholders, a family trust or a cross-border buyer: gather the share register, 24 months of financial statements and asset valuations, the offer letter, asset tax-cost and undepreciated-capital-cost schedules, and prior T657 and T936 calculations for tax preparation.