Is there a double-taxation risk when my corporation sells its assets?

An asset sale by a corporation is two separate events for tax purposes. The corporation sells the assets and is taxed on the result. The shareholders pay tax later, when money moves from the corporation to them. Sellers call this double taxation, though the Income Tax Act includes tools that reduce the overlap.

The first layer: tax in the corporation

The corporation reports the sale on its own T2 return, which resident corporations generally have to file every tax year, with a few exceptions such as registered charities. The CRA’s guidance on selling a business notes that selling assets can produce a recapture or a terminal loss of capital cost allowance, and that the sale agreement may set a price for each asset, a value for the inventory and an amount for goodwill. The gain and any recapture are therefore part of the corporation’s result for the year.

The second layer: tax when owners take the money

A taxable dividend received from a corporation resident in Canada is included in the shareholder’s income under section 82(1) of the Income Tax Act. If the corporation redeems or cancels shares instead, section 84(3) deems a dividend to be paid to the extent the amount paid exceeds the paid-up capital. Either route can create a shareholder-level tax bill on top of the corporate tax.

What can soften the second layer

A private corporation can elect under section 83(2) to pay a capital dividend out of its capital dividend account, which includes the untaxed portion of its capital gains, and no part of a capital dividend is included in the shareholder’s income. The CRA also explains that the capital gains deduction applies to qualified small business corporation shares and certain farm and fishing property. In an asset sale the corporation disposes of the assets, so that deduction does not attach to the asset gain.

Why the total depends on the details

The combined result turns on the mix of assets sold, how the price is allocated, what sits in the capital dividend account, and how the shareholders extract the cash. Our answers on selling shares or assets and CCA recapture cover two of those pieces. An accountant can model each structure with your numbers.