Why do business sellers want to sell shares instead of assets?

A share sale and an asset sale hand the same business to a buyer, but different people sell and different tax rules apply. In a share sale the shareholder sells their shares. In an asset sale the corporation sells its assets. The reasons an owner may prefer a share sale follow from that difference.

The capital gains deduction

The CRA says a person with taxable capital gains from disposing of qualified small business corporation shares may be eligible to claim a capital gains deduction. The Income Tax Act gives the deduction to an individual (other than a trust) who was resident in Canada throughout the year, so it applies to a shareholder’s sale of qualified shares and not to a corporation’s sale of its own assets. The Act defines a qualified share by tests. They include that, throughout the 24 months before the sale, the shares were not owned by anyone other than the individual or a person or partnership related to the individual, subject to the deeming rules in subsection 110.6(14). They also include that, throughout the part of that period when the individual or such a related person owned the shares, the corporation was a Canadian-controlled private corporation and most of the fair market value of its assets was attributable to assets used principally in an active business carried on primarily in Canada by it or a related corporation, to certain shares and debt of connected corporations, or to both. The CRA says the limit is indexed, so check its page for the current figure.

Recapture and who receives the price

In an asset sale the corporation is the seller, so the price is paid to the corporation. The CRA notes that, depending on the situation, selling assets can produce a recapture or a terminal loss of capital cost allowance. Getting the money from the corporation to its shareholders is then a separate step to plan with an accountant. A sale of all or substantially all of a corporation’s property outside the ordinary course also needs shareholder approval under the Canada Business Corporations Act and Ontario’s Business Corporations Act, which adds a formal step to the asset route.

What the buyer may say back

Which structure a deal uses is a term the buyer and seller have to agree, so a seller’s preference is a starting position, not a result. A buyer may not want the same structure. Our answer on whether to sell shares or assets sets out both sides.