Buying a Business in Canada: Shares, Assets and Tax

Am I buying shares, assets or a partnership interest?

The agreement should identify exactly what changes hands. A corporation can sell its assets, or its owners can sell shares in the corporation. A sole proprietor has no shares to sell. A partner may sell an interest in the partnership, which differs from the partnership selling its assets (CRA: buying a business; CRA: partnership interest cost).

An interest in a partnership is not a direct purchase of its equipment. A partner's interest has its own tax cost, which changes with later partnership income, losses and withdrawals (CRA: partnership return guide). Confirm whether the agreement transfers an interest or whether the partnership itself is selling property. If you are buying out one shareholder while the corporation continues, see Adding or removing an owner.

A partnership interest is generally an exempt financial service for GST/HST; Form GST44 applies to qualifying business asset transfers, not the interest itself. Changing partners does not reset the partnership's asset tax costs (CRA: financial instruments; Finance Canada: equity interests; CRA: partnership return guide).

If you become a general partner, you can owe partnership GST/HST payable during your membership even after leaving. For earlier amounts, liability is limited to partnership property and money; a limited partner who is not a general partner is excluded (Excise Tax Act, subsection 272.1(5)).

Why might the seller want a share sale, and what stays with the corporation?

A seller may prefer to sell shares because the seller's tax result can differ from an asset sale. For the buyer, the corporation still owns its property after the share transfer, and the transfer does not increase the tax cost of that property (CRA: buying a business). The seller's tax treatment belongs in Selling your business.

The same corporation also keeps its business number, program accounts and filing history. Ask for filed income tax and GST/HST returns, notices of assessment, account statements, payroll records, financial statements and an asset tax-cost schedule. With proper authorization, a representative can view CRA balances for corporation income tax, GST/HST and payroll accounts, and request notices and statements (CRA: representative services). A clean balance today does not settle the treatment of an unfiled return or a later reassessment. Have counsel review debts, employee obligations, leases, licences and contract consents before agreeing to take over the corporation.

For a restaurant or other cash business, compare register totals and bank deposits with the financial statements and filed returns; resolve differences before relying on claimed sales (CRA: business records). If you become a director, check unpaid payroll deductions and GST/HST, then monitor remittances: directors can be personally liable for withholding or remittance failures during their term, subject to collection conditions and a due-diligence defence. CRA must start income-tax recovery proceedings or assess GST/HST liability within 2 years after the person last ceased to be a director (Income Tax Act, section 227.1; Excise Tax Act, section 323).

Provincial director liability also matters in a share purchase. Quebec's Tax Administration Act, sections 24.0.1–24.0.2, covers unremitted QST and source deductions; B.C.'s Provincial Sales Tax Act, sections 207 and 210, covers PST failures; and Manitoba's Tax Administration and Miscellaneous Taxes Act, section 43, covers unpaid provincial sales tax. Each has collection and due-diligence conditions and a 2 years post-departure assessment limit. Saskatchewan's Revenue and Financial Services Act, section 48.1, covers provincial tax failures and allows notice within 4 years after a director leaves (Quebec law; B.C. law; Manitoba law; Saskatchewan law).

What new tax cost does an asset purchase give me?

An asset purchase gives the purchaser a cost for the assets acquired; a share purchase gives the purchaser a cost for the shares while the corporation's asset tax values stay as they were. The difference matters when inventory is sold or capital property is used or later disposed of (CRA: buying a business).

Asset cost is not an immediate deduction for every item. Purchased inventory enters the cost of goods sold calculation; depreciable equipment, buildings and goodwill go into their applicable capital cost allowance classes. Land is not depreciable. Goodwill generally enters Class 14.1 (CRA: buying a business; CRA: depreciable property classes). The timing and amount of later claims belong in Capital cost allowance. Compare the price and terms of both offers before choosing a structure; the larger asset tax cost alone does not establish the cheaper deal.

A corporate share buyer may later raise the cost of eligible non-depreciable capital property, such as land, by winding up or amalgamating the target and designating an amount under paragraph 88(1)(d) or subsection 87(11). The parent designates it in its T2 for the windup year, or the amalgamated corporation in its first T2. This does not raise inventory, equipment or goodwill costs (Income Tax Act, section 88; CRA: amalgamations).

How should we split the price among inventory, equipment, goodwill and property?

Put a reasonable allocation in the purchase agreement and support it with an asset schedule. The CRA says that reasonable asset prices in the agreement can be used for capital cost allowance; otherwise, the buyer must allocate the price among assets, inventory and goodwill. Asset amounts should reflect fair market value, and goodwill receives the balance after those amounts are assigned (CRA: buying a business).

The buyer's allocation should match the amounts the seller reports. A buyer and seller may have different tax preferences, so resolve an unsupported split before signing rather than assigning all excess price to a convenient category later (CRA: buying a business).

If substantially all business property and its outstanding receivables transfer and the buyer continues the business, buyer and seller can jointly elect on Form T2022. The seller deducts the receivables' price discount; the buyer includes it in income and may later claim eligible bad debts. Send two signed copies for the sale year; the current Act and form give no fixed filing day (Income Tax Act, section 22; CRA: Form T2022).

Does GST/HST apply to the assets, and when can we make the joint election?

A taxable asset sale can attract GST/HST. If the agreement transfers a business or an operating part of one, the buyer and seller may jointly elect for no GST/HST to be payable on qualifying supplies under Form GST44. Buying isolated assets is insufficient. Even without the election, GST/HST does not apply to the amount reasonably allocated to goodwill if the business and necessary-property tests are met (CRA: GST/HST memorandum 14-4). A sale of corporate shares is generally outside GST/HST (CRA: buying a business).

For the business-sale election, the buyer must acquire all or substantially all (generally at least 90% by fair market value) of the property reasonably necessary to carry on that business, and must be capable of continuing it with the property acquired. If the seller is a GST/HST registrant, the buyer must also be registered. On Form GST44, the parties identify buyer and seller in Parts A and B, describe the acquisition in Part C, and both sign Parts D and E. A registered buyer files by the due date of the first GST/HST return for the period in which tax would otherwise have become payable; if both parties are non-registrants, the buyer keeps the signed form (CRA: memorandum 14-4). Check the buyer's registration status and the asset package before closing; merely writing “GST/HST exempt” in the agreement does not make the election valid.

If the buyer misses the filing deadline, it can apply to the CRA for a later date; relief is discretionary (CRA: memorandum 14-4).

The election does not remove GST/HST from a taxable service the seller will render, a taxable lease or licence, or a taxable real property sale to a buyer who is not registered (CRA: memorandum 14-4). If commercial real estate is included, see GST/HST on commercial property for who pays or self-assesses. For registration before future sales, see When to register for GST/HST.

If the buyer later reduces commercial use of acquired capital property, GST/HST change-in-use rules may apply (CRA: memorandum 14-4).

What changes if the business is in Quebec?

Revenu Québec administers a joint election for GST/HST and QST when the sale qualifies. On Form FP-2044-V, the parties list the acquisition in Part 3 and both sign Parts 4 and 5. A registered buyer sends it to Revenu Québec by the due date of the GST/HST and QST return for the reporting period of the acquisition. The qualifying transfer and registration conditions are similar: a registrant seller cannot use the election with a non-registrant buyer, and the buyer must acquire at least 90% of the property needed to carry on the business (Revenu Québec: Sale of a Business).

Revenu Québec also lists taxable services, leases or licences, and real property sold to a non-registrant as exceptions. Confirm both tax registrations and the Quebec form before the agreement fixes who bears tax if the election fails (Revenu Québec: Sale of a Business).

What provincial sales tax checks apply outside Quebec?

A GST44 election does not settle provincial sales tax. In British Columbia, obtain the seller's PST clearance certificate before a bulk asset or partnership-interest purchase; without it, section 187 of the Provincial Sales Tax Act makes the buyer liable for PST owed on that business at purchase. The seller can request it on Form FIN 447. Taxable assets may also attract PST (B.C.: Buying and selling a business).

For a Saskatchewan bulk asset sale, get the seller's Clearance Certificate or risk liability under section 51 of the Revenue and Financial Services Act for its provincial tax debts. Apply for a PST number through SETS; file a Business Assets Declaration Form and pay PST on taxable assets within 30 days. In Manitoba, get the seller's Bulk Sale Clearance Certificate before paying; without it, the buyer can owe the seller's provincial tax debts under section 45 of the Tax Administration and Miscellaneous Taxes Act. File a Casual Purchaser's Return and pay RST by the 20th day of the following month; late payment adds 10% plus interest (Saskatchewan: Buying and Selling a Business; Manitoba: Bulk Sales). Corporate share purchases do not require these bulk-sale certificates.

Can I use the acquired corporation's old losses?

Do not price a share purchase on the assumption that old losses will shelter future profits. When control changes, the corporation's tax year generally ends immediately before the acquisition, and it must file a return for that short year. If control changes within 7 days after its established year-end, the corporation can elect in that year's T2 to extend the earlier year to the acquisition, subject to the statutory conditions (Income Tax Act, subsection 249(4)).

Calendar that return within 6 months of the short year-end. The income tax balance is generally due within 2 months, or 3 months if the corporation meets the eligible CCPC conditions (CRA: T2 filing; CRA: balance-due day).

Under the Income Tax Act's loss restriction rules, pre-change net capital losses generally cannot be carried into a later tax year. A pre-change business non-capital loss may be usable only if the loss business continues for profit throughout the later year, and only against income from that business or a qualifying similar business. The result depends on the corporation's actual loss records, business activities and whether control changed. Review the loss schedules and the proposed operations before assigning any purchase value to those losses.

The acquired corporation can designate appreciated capital property under paragraph 111(4)(e) to recognize a gain before control changes, use expiring capital losses and raise that property's tax cost. It reports this in the pre-change T2 (Schedule 6), or files the prescribed form within 90 days after the year's assessment or no-tax notice (Income Tax Act, paragraph 111(4)(e); CRA: T2 Guide, Schedule 6).

Should I buy personally or through a new corporation?

For an asset purchase, a sole proprietor reports business profit or loss personally; a buyer corporation owns the assets and files its own T2; and a partnership's partners report their shares of its income (CRA: sole proprietorship; CRA: corporation returns; Income Tax Act, section 96). For a share purchase, you or your buyer corporation owns the shares, while the acquired corporation continues to operate. Compare financing, liability and how you will take earnings before choosing the legal buyer.

An asset buyer who pays a non-arm's-length seller less than fair market value can owe the seller's covered income-tax and GST/HST debts, up to the value shortfall. CRA may assess this at any time (Income Tax Act, section 160; Excise Tax Act, section 325).

If the seller is non-resident, check whether the assets, shares or partnership interest are taxable Canadian property before paying. Under Income Tax Act section 116, the buyer can owe 25% of the price above any certificate limit, or 50% for depreciable property and other property covered by subsection 116(5.2). The seller requests a clearance certificate on Form T2062 or T2062A; absent sufficient certificate coverage or another exception, the buyer withholds and remits by 30 days after the end of the acquisition month. Excluded property and treaty-protected property can remove buyer liability; a related buyer of treaty-protected property must notify CRA on Form T2062C within 30 days after acquisition (Income Tax Act, section 116; CRA: acquiring Canadian property from a non-resident).

The purchaser named in the asset agreement should be the purchaser making the joint GST/HST election and, if the seller is registered, the GST/HST registrant that meets its conditions (CRA: memorandum 14-4).

If a new corporation will operate the business, arrange its formation, funding and program accounts in time for closing. Do not sign personally on the assumption that the corporation can simply claim the same asset purchase or election later; changing the buyer can require revised legal documents and a fresh tax review. See After you incorporate for the corporation's account setup.

What CRA numbers and accounts should I check around closing?

The required CRA changes depend on who bought what. A new owner of a sole proprietorship needs a new business number and program accounts; a change in partnership members can also require them, depending on the agreement and how the partnership was registered. After a share sale, verify the corporation's registry and CRA records. If directors or recorded owner details change, update the registry first, then provide the CRA with supporting documents (CRA: change of owners, partners, or directors).

The CRA's representative service lists access to account balances and notices for income tax, GST/HST and payroll, subject to authorization (CRA: representative services). Review the records again at closing if the signing and transfer dates differ.

If employees move to a new employer in an asset deal, set up the buyer's payroll account, get prior payroll records and check who must issue records of employment. CPP/EI successor rules and an ROE exception may apply (CRA: succession of employers; Service Canada: ROE guide). See Running payroll for setup. In a share deal, review the continuing corporation's payroll account and balances.

Does a restaurant or franchise change the allocation or local checks?

A restaurant or franchise follows the same share-versus-asset and GST/HST framework, but the assets and contract rights can change the allocation. For a restaurant, list inventory, equipment, goodwill and any lease separately. The CRA's business-sale memorandum uses a restaurant example to show that replacing some furnishings does not necessarily defeat the election when the buyer still receives the necessary operating package (CRA: memorandum 14-4).

For a franchise, identify whether the right being bought has a limited term. CRA lists a limited-period franchise in Class 14 and an unlimited-period franchise among Class 14.1 examples (CRA: depreciable property classes). A new franchise licence and manuals alone do not qualify as a business sale for GST44; even in a qualifying sale, a taxable licence or future training fee remains taxable (CRA: memorandum 14-4). Ask counsel to check transfer consent, leases, local permits and employment matters; the tax allocation cannot establish that those rights transfer.

Example

Illustrative amounts in Canadian dollars. A buyer's new corporation agrees to buy a restaurant's operating assets for C$500,000: C$40,000 of inventory, C$110,000 of equipment, and C$350,000 of goodwill. The agreement lists and supports those amounts. The buyer does not acquire the seller's shares, so the buyer records costs for those assets rather than inheriting the seller corporation's asset tax costs. Inventory enters cost of goods sold; equipment and goodwill are assigned to their applicable capital cost allowance classes.

Both corporations are GST/HST registrants. If the agreement transfers the operating business and enough necessary property, they may jointly elect on Form GST44 for qualifying supplies. A separate taxable lease or service remains taxable. If instead the buyer purchases the seller corporation's shares for C$500,000, the buyer's cost attaches to the shares; the restaurant's asset tax costs stay in the corporation. The buyer must then review the corporation's returns, tax accounts and liabilities before closing.

Different for you?

• You are selling rather than buying: see Selling your business for the seller's share and asset tax results.
• You are buying out one owner: see Adding or removing an owner.
• You need the later asset deductions: see Capital cost allowance.
• Your buyer corporation needs CRA accounts: see After you incorporate.
• You need GST/HST registration before operating: see When to register for GST/HST.
• Commercial real estate is part of the deal: see GST/HST on commercial property.
• The deal includes a share purchase, disputed liabilities, uncertain loss use, or an election close to its deadline: gather the agreement, asset schedule, tax returns, notices, account statements, payroll records and buyer entity details for business formation help.