Is money from selling a business or its assets taxed as income?

Money from selling a business is not all taxed one way. The Canada Revenue Agency (CRA) looks at what each part of the price was paid for. Some of it can be a capital gain, some can be business income, and some can be a recaptured deduction you took in earlier years. This page explains the categories the CRA uses so you can ask your accountant the right questions. It does not say how much tax you will owe.

Capital property and the taxable portion

The CRA’s capital gains guide describes a taxable capital gain as the portion of your capital gain that you have to report as income on your return. The Income Tax Act determines a taxpayer’s capital gain from the disposition of any property under its capital gains rules, but only to the extent the gain would not otherwise be included in income, and with listed exceptions. So a capital gain is not simply added to income in full: the guide separates the gain from the taxable part of it.

Inventory is treated differently

The same guide says capital property does not include the trading assets of a business, such as inventory. That means the part of your price attributed to inventory does not fall under the capital gains rules. Ask your accountant how it is reported, and how the sales agreement values it.

Depreciable assets and goodwill

If a class of depreciable property has a negative undepreciated capital cost balance at the end of the year, the CRA says the amount is a recapture of capital cost allowance and you include it in your income for the year of sale. The CRA’s page on selling a business says you may have a recapture or a terminal loss on a sale of assets. Starting January 1, 2017, the CRA includes goodwill in Class 14.1, so ask how goodwill you sell is reported.

The sales agreement sets the split

The CRA notes that a sales agreement sometimes sets a price for each asset, a value for the inventory and, if applicable, an amount attributed to goodwill. Because each category is treated differently, that allocation deserves attention before you sign. Ask your accountant to model more than one split before it is fixed in the contract.

For the broader picture, see How is a business sale taxed in Canada?.