How is a business sale taxed in Canada?

There is no single “business sale tax” in Canada. What you owe depends on the legal form of the deal, on who the seller actually is, and on what the business is made of. The same purchase price can produce very different tax outcomes depending on the structure chosen. That is why structure gets negotiated early, before the price is even settled.

Share sales and asset sales are taxed differently

A share sale is a sale by you, the shareholder, of your shares in the company. The company itself is not the seller, and generally the result is a capital gain or loss to you personally, measured against the adjusted cost base of the shares. An asset sale is a sale by the company of its property — equipment, inventory, goodwill, contracts. The company reports the tax consequences, and you still hold a corporation with cash in it. Buyers usually prefer asset deals, sellers usually prefer share deals, and the gap between those preferences is a real negotiating point.

An asset sale is really several sales at once

In an asset sale, each class of property is taxed on its own terms. Inventory generally produces ordinary business income. Depreciable property can produce recapture of capital cost allowance where the proceeds exceed the remaining undepreciated balance, and recapture is generally taxed as income rather than as a capital gain. Goodwill and similar intangibles fall into their own class with their own rules. Real property can carry both recapture and a capital gain. The mix matters enormously, and two businesses selling for the same headline price can face very different bills.

Getting the money out of the company is a second step

After an asset sale, the sale proceeds sit inside the corporation. Moving that cash to you personally is its own taxable event, usually as a dividend, a salary, or a distribution on winding up the company. Some of it may flow out on a more favourable basis where the corporation has balances built up from the capital-gain portion of the sale, but the mechanics are technical and depend on the corporation’s tax accounts. Plan the extraction at the same time as the sale, not afterwards.

Rates, limits and provincial differences

• Only a portion of a capital gain is included in income. The inclusion rate is set by legislation and has been the subject of recent legislative proposals, so confirm the rate in force for your year rather than assuming.
• A lifetime capital gains exemption may shelter part of a gain on qualifying small business corporation shares, but the exemption amount is indexed and the qualifying tests are strict.
• Corporate and personal tax rates combine a federal layer and a provincial or territorial layer, so the same transaction produces different totals in different provinces.
• GST/HST and provincial sales taxes can apply to an asset sale, and Quebec administers its own regime through Revenu Québec.
• Land transfer tax on real property is provincial, and some municipalities add their own.

What to do before you sign anything

Get your accountant and a tax lawyer involved before the letter of intent, not after. Structure is far easier to shape at the term-sheet stage than once the parties have shaken hands on a form of deal. Ask specifically what your after-tax proceeds look like under each structure, because that number, not the purchase price, is what you actually take home.