Tax
The tax side, in plain English.
How a Canadian business sale is taxed — asset versus share, the capital gains exemption, GST/HST, recapture — mechanism first, and never a stale figure.
Guides
- Tax when you sell a business in AlbertaTax on selling a business in Alberta runs on the same federal framework used everywhere in Canada — GST rules, the capital gains regime, and the lifetime capital gains exemption where shares qualify — with two Alberta-specific differences: there is no provincial sales tax, and Alberta requires its own separate corporate income tax filing rather than a single combined federal-provincial one.
- Tax when you sell a business in QuebecTax on selling a business in Quebec combines the same federal framework that applies everywhere in Canada — GST, the capital gains regime and the lifetime capital gains exemption where shares qualify — with a genuinely separate provincial layer, since Quebec administers its own sales tax and its own income tax filings through Revenu Québec rather than relying on the CRA alone.
- Tax when you sell a business in OntarioTax on selling a business in Ontario runs on two tracks: federal rules — capital gains treatment, the lifetime capital gains exemption and CCA recapture — that apply the same way across Canada, layered under Ontario’s own harmonized HST mechanics and provincial income tax brackets that determine what an Ontario seller actually keeps.
- Tax when you sell a business in British ColumbiaTax on selling a business in British Columbia combines a federal framework — capital gains treatment, the lifetime capital gains exemption and CCA recapture — that applies the same way across Canada, with BC-specific mechanics: provincial sales tax charged separately from GST rather than a harmonized rate, BC’s own income tax brackets, and Property Transfer Tax if real estate changes hands.
- Tax when you sell a business in CanadaSelling a business in Canada is generally taxed either as a capital gain, if you’re selling shares of a corporation you own personally and potentially eligible for the lifetime capital gains exemption, or as a mix of income and capital gain inside the corporation if you’re selling the company’s assets, with the after-tax outcome shaped heavily by which structure is used.
- Asset sale vs share sale in CanadaIn an asset sale the buyer purchases specific assets and liabilities out of the corporation, leaving the seller’s company and its history behind, while in a share sale the buyer purchases the shares of the corporation itself and inherits it, including its liabilities and history, with the two structures taxed differently, carrying different risk for the buyer, and often preferred by opposite sides of the same deal.
- The tax-planning runway before a business saleThe tax-planning runway before a business sale is the period, ideally measured in years rather than weeks, during which a seller reorganizes their corporation, separates active business assets from investment or personal assets, and confirms whether their shares can meet the conditions for available exemptions, steps that generally cannot be completed in the short window between accepting an offer and closing.
- GST/HST on a business saleGST/HST generally applies to the sale of a business’s assets in Canada unless the parties qualify for and properly file a joint election treating the sale as a transfer of a business as a going concern, which relieves the transaction from tax; a share sale, by contrast, is typically treated differently for sales tax purposes because it is a sale of shares rather than a sale of taxable property.
Expert answers
- Do SR&ED credits survive a change of control?SR&ED credits already claimed and assessed generally remain valid after a change of control, but the change itself can trigger a deemed tax year-end and reset or reduce the expenditure limit that determines how generous a refundable credit rate the company qualifies for going forward, which is a separate question from whether past claims survive.
- How is property tax adjusted when a business sale includes real estate?Property tax on real estate included in a business sale is normally prorated between buyer and seller as of the closing date through a statement of adjustments, so the seller is credited for tax prepaid covering the period after closing, and the buyer is charged for any period still owing. The adjustment reflects who actually owns the property for which part of the tax year, not the municipality’s billing calendar.
- How is a business sale taxed in Canada?Tax on a Canadian business sale turns mostly on whether you sell shares or assets. A share sale is usually one capital gain in the shareholder’s hands. An asset sale is taxed piece by piece inside the company, and getting the proceeds out to you is a second, separate taxable step.
- Do my shares qualify for the capital gains exemption?Your shares must generally meet the qualified small business corporation tests: a Canadian-controlled private corporation, an asset test at the moment of sale, a broader asset test looking back over the preceding two years, and a holding-period test. All must be satisfied. Have your accountant confirm your position well before closing.
- What is purification, and why does it matter before a sale?Purification is the process of removing assets that are not used in the active business — surplus cash, investments, redundant real estate — from a corporation so that its shares can meet the qualified small business corporation asset tests. Because one of those tests looks back over the prior two years, purification is a planning exercise, not a closing-day fix.
- How far ahead should I plan a business sale for tax?Start at least two to three years before you intend to sell. Several of the most valuable Canadian reliefs depend on tests that look backwards over a twenty-four-month period, so decisions made close to closing often cannot change the outcome. Later planning still helps with deal structure, but the biggest levers need lead time.
- How is a vendor take-back taxed?Where you sell shares or capital property and part of the price is payable in later years, a capital gains reserve may let you recognize the gain as you are paid rather than all at closing. The reserve is capped and limited to a maximum number of years, and it does not apply to every kind of property or to interest on the note.
- How is an earn-out taxed?Earn-out treatment depends heavily on drafting. Where the CRA’s administrative cost-recovery method applies to a share sale, payments may reduce the adjusted cost base first and produce a capital gain as they are received. Where it does not apply, earn-out payments can be taxed as ordinary income. Draft the clause with tax advice.
- What is purchase price allocation, and who decides it?Purchase price allocation is the split of the total price across the assets being sold — inventory, equipment, real property, goodwill, restrictive covenants. Buyer and seller negotiate it and record it in the agreement, but it must be reasonable. The CRA can reallocate amounts that do not reflect fair market value.
- What taxes does a buyer pay when buying a business?A buyer generally faces sales tax on an asset purchase, provincial land transfer tax on any real property, and in a share purchase the inherited tax history of the company itself. Elections can relieve some sales tax on a going-concern asset sale. The larger exposure is usually inherited liability, not transaction tax.
- What happens for tax if I sell my business at a loss?Selling below your cost generally produces a loss, but the kind of loss matters. A capital loss on shares normally offsets only capital gains. An allowable business investment loss may, where conditions are met, offset other income. In an asset sale a terminal loss on depreciable property is generally deductible against business income.
- What is a section 85 rollover?A section 85 rollover is a joint election that lets you transfer eligible property to a taxable Canadian corporation for share consideration without triggering the full tax on the accrued gain immediately. The elected amount sets the deferral, within limits, and the election must be filed on time. It defers tax; it does not eliminate it.
- Should I incorporate before selling my business?Incorporating can open the door to a share sale and to the lifetime capital gains exemption, which is unavailable to a sole proprietor. But the qualifying tests look back over a period of years, so incorporating shortly before a sale usually will not deliver those benefits. The decision needs lead time and advice.
- Do I charge GST/HST when I sell my business in Canada?By default, GST/HST applies to the sale of most business assets in Canada. Where the sale qualifies, the buyer and seller can jointly elect under section 167 of the Excise Tax Act so that no GST/HST is charged on the assets transferred. A share sale is different: shares are not a taxable supply, so the question does not arise.
- How is goodwill taxed when I sell my business?In an asset sale, goodwill is treated as eligible capital property within the capital cost allowance system, and a disposition generally produces a mix of income and capital gain treatment depending on the corporation’s history with the asset class. It is taxed differently from equipment, which is why the purchase price allocation matters to both sides.
- What is CCA recapture when I sell my business assets?CCA recapture occurs when depreciable assets are sold for more than their remaining undepreciated capital cost. The depreciation previously claimed is brought back into income in the year of sale and taxed as ordinary business income — not as a capital gain, and not eligible for the lifetime capital gains exemption.
Checklists
- Buyer tax structure checklistA buyer tax structure checklist for a Canadian business purchase lists the structural questions to work through with an accountant and lawyer before an offer is finalized — asset versus share purchase, whether to buy personally or through a holding company, purchase price allocation, HST eligibility and related-party considerations — since the structure chosen shapes tax outcomes long after closing.
- Seller tax readiness checklistA seller tax readiness checklist for a Canadian business sale covers the corporate structure questions a seller should work through with an accountant and tax lawyer well before listing — whether the company would need to be purified to hold shares eligible for preferential capital gains treatment, how the deal structure affects the tax outcome, and whether any outstanding tax matters need resolving first.
Comparisons
- Share sale vs hybrid saleA share sale transfers the whole corporation as one unit, while a hybrid sale layers an asset-level carve-out, or a pre-closing reorganization, onto a share sale so specific assets, liabilities or licences move differently from the rest of the company — reached for when neither a clean share sale nor a clean asset sale can satisfy something material to one side of the deal.
- Asset sale vs share saleAn asset sale transfers the individual assets and liabilities a buyer agrees to take, sold out of the seller’s corporation, while a share sale transfers ownership of the corporation itself, including everything already inside it. The two produce different tax results for the seller and different liability exposure for the buyer, which is why the structure is negotiated rather than simply chosen by whoever is selling.
Definitions
- HoldcoA holdco, short for holding company, is a corporation whose main role is owning shares in another company, called the opco, rather than running day-to-day operations itself. Business owners commonly use a holdco to move surplus cash out of the operating company or to hold shares ahead of a future sale.
- Family trustA family trust is a legal arrangement where a trustee holds property, such as shares in a family business, for the benefit of named beneficiaries, typically family members. It is commonly used alongside an estate freeze to spread future growth and income among several family members.
- Lifetime capital gains exemption (LCGE)The lifetime capital gains exemption is a federal deduction that allows an eligible Canadian resident individual to shelter capital gains realised on the sale of qualifying small business corporation shares, or qualified farm or fishing property. It is a lifetime limit, indexed annually, and it applies to share sales — not to asset sales.
- Qualified small business corporation (QSBC) sharesQualified small business corporation shares are shares of a Canadian-controlled private corporation that meet specific tests about the corporation’s activities, the composition of its assets, and how long the shares have been held. Meeting the QSBC tests is what makes the lifetime capital gains exemption available on a share sale.
- Section 167 election (GST/HST)The section 167 election is a joint election filed by a buyer and seller that, where the conditions are met, allows the sale of a business or part of a business to proceed without GST/HST applying to the assets transferred. It is available on qualifying asset sales, and both parties must elect.
- CCA recaptureCapital cost allowance recapture happens when depreciable assets are sold for more than their remaining undepreciated capital cost. The previously claimed depreciation is effectively taken back and included in income — taxed as ordinary business income, not as a capital gain.
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