Tax planning before you sell

Tax is one of the last things many Canadian business owners think through carefully before a sale, and often one of the things that most affects what they actually keep once a deal closes. The structure of a transaction, and how early a seller starts thinking about it, can matter as much as the headline purchase price.

Asset sale versus share sale

Most Canadian small business sales are structured one of two ways. In an asset sale, the corporation sells specific assets, such as equipment, inventory, and goodwill, and the buyer typically picks which liabilities, if any, come along with them. The corporation is taxed on any gain from the sale, and further tax considerations can apply if and when the remaining proceeds are eventually distributed out of the corporation to its shareholders. In a share sale, the buyer purchases the shares of the corporation directly, taking on the business as a whole, including its history and any liabilities that were not specifically excluded in the purchase agreement. Sellers often prefer a share sale for tax reasons, while buyers often prefer an asset sale because it lets them choose what they are taking on, which is one of several reasons the two sides can end up negotiating over deal structure almost as much as over price.

• Whether the sale is structured as an asset sale or a share sale, and why each side may prefer one over the other
• Whether any part of the price is deferred through a vendor take-back, which can affect when a related gain is reported for tax purposes
• Whether the corporation holds any non-business assets or investments that could affect eligibility for certain tax treatments, sometimes prompting a "purification" of the company well before a sale is contemplated
• Whether holdbacks, earn-outs, or non-compete payments are treated differently for tax purposes than the base purchase price
• Provincial and federal filing obligations tied to the year of sale

The lifetime capital gains exemption, and why earlier planning helps

Canadian tax law provides a lifetime capital gains exemption on the sale of qualifying small business corporation shares, subject to a number of conditions, including how the corporation's assets have been used and how long the shares have been held. The exemption can meaningfully reduce the tax owing on a share sale for an owner who qualifies, but eligibility rules are detailed and the exemption amount and specific conditions are set and adjusted federally over time, so this article does not attempt to state current figures or thresholds, since anything cited here could be outdated by the time you read it. Whether a specific sale qualifies, and how to structure a corporation to preserve eligibility, is a question for an accountant familiar with the business's specific history, not something a general article can answer. Some of the structuring options that affect a seller's after-tax proceeds, such as reorganizing a corporation's share structure or addressing non-business assets sitting inside it, need time to implement properly and are far harder to do cleanly once a buyer is already at the table, which is why owners who bring in an accountant well before actively marketing a business, sometimes a year or more ahead, generally have more options available to them than owners who only start thinking about tax once an offer is in hand. None of this changes the fact that every sale is different, and the right structure depends on the specific business, its corporate history, and the seller's broader financial picture.