Selling a business in Canada is one of the most important financial events an owner will ever undertake. Two common structures are a share sale (buyer purchases the company’s shares) and an asset sale (buyer picks specific assets and leaves liabilities behind). Which is preferable depends on tax, liability, buyer expectations and whether the seller can access the Lifetime Capital Gains Exemption (LCGE). Below we compare the two, explain the LCGE (often discussed historically as “$750k”), and offer practical takeaways.
What’s the difference (in plain language)
Share sale
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Buyer acquires the legal owner of the business that is typically the corporation’s shares.
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Buyer generally takes on the company’s contracts, employees, licences and historic liabilities (unless otherwise agreed).
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Seller usually treats proceeds as a capital gain, which can access preferential tax treatment and, if eligible, the LCGE.
Asset sale
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Buyer selectively purchases assets (equipment, goodwill, inventory, client lists, etc.) and often leaves liabilities with the company.
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Buyers usually prefer asset sales because they can “step up” the tax cost (capital cost) of acquired assets for depreciation/tax purposes.
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Sellers may face double taxation if the corporation must sell assets at the corporate level and then distribute proceeds to shareholders.
Tax implications (the headline points)
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Sellers in a share sale: Proceeds are normally taxed as capital gains. Capital gains have a preferential inclusion rate vs normal income, and the seller may qualify for the LCGE on qualified small business corporation shares, which can dramatically reduce or eliminate tax on the gain.
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Sellers in an asset sale: The corporation sells assets and pays tax on gains at the corporate level. If shareholders then receive liquidating distributions, those can be taxed again when paid out — potentially resulting in a higher overall tax burden. Buyers typically pay less for shares because they are taking on liabilities; conversely buyers may pay more for assets that offer tax deductions.
Other important differences (risk, complexity, price)
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Liability transfer: Share sale = buyer inherits historical liabilities (lawsuits, tax exposures). Asset sale = buyer can avoid many legacy liabilities. This often makes asset sales more attractive to buyers and share sales more attractive to sellers.
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Purchase price allocation: In an asset sale buyers allocate price to particular asset classes (goodwill, equipment, inventory), which affects future tax deductions. In a share sale, the buyer usually inherits historical tax bases and may negotiate a lower price to reflect unknown liabilities or tax exposures.
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Complexity & closing: Share sales can be cleaner for sellers (one contract, one closing) but require careful due diligence and often more buyer warranties. Asset sales may need multiple assignments and consents (leases, supplier contracts), adding execution complexity.
Why the “$750k capital gains exemption” matters (and what the number means)
You mentioned the “$750k capital gains exemption.” Historically, over the decades the lifetime capital gains exemption (LCGE) amount has changed several times (older materials sometimes reference figures like $750,000). The key point is not the exact dollar figure but what the LCGE does: it can shelter a large portion or even the entirety of the capital gain on the sale of qualified small business corporation (QSBC) shares, meaning the selling shareholder may pay little or no tax on the gain if they meet the tests. That potential tax saving is often the single biggest reason sellers prefer share sales.
Important update: as of changes effective June 25, 2024 the LCGE limit for qualified small business shares and for qualified farm/fishing property was significantly raised (recent government and CRA materials show new, higher limits and indexation). Because the LCGE level has changed from older figures like $750k, it’s essential to check the current statutory amount when planning a sale. The Canada Revenue Agency provides up-to-date guidance on the capital gains deduction and the LCGE.
Basic eligibility for the LCGE (very briefly)
To claim the LCGE on shares the shares must meet the qualified small business corporation tests — including active business tests and ownership timing rules (e.g., shares must have been held for a minimum time and at least 50% of the corporation’s assets must be used in an active business). These tests are technical; mistakes can disqualify a claim, so early planning is critical.
Practical tips for sellers (next steps)
- Get tax and legal advice early. Structure affects taxes, purchase price, and liability. A professional can run numbers for both scenarios.
- Run the LCGE eligibility check today. If you’re close to selling, confirm the shares meet QSBC conditions — otherwise a share sale may not get the intended tax benefit.
- Negotiate price allocation. Buyers and sellers should negotiate allocation (asset sale) or price discounts (share sale) to reflect tax outcomes and risks.
- Consider indemnities & escrow. Share sales often need purchase price holdbacks or indemnities to handle undisclosed liabilities. Asset sales require careful assignment of contracts and licences.
Bottom line
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For sellers who qualify, a share sale is usually more tax-efficient because the proceeds are capital gains and may be reduced or eliminated by the LCGE — which is why the exemption (sometimes referred to in older materials as $750k) is so important. However, share sales transfer legacy liabilities and often require careful buyer protections that can reduce offers.
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For buyers, an asset sale is often preferable for the tax “step-up” on assets and for avoiding historical liabilities, but it can be more complex to implement and may cost more in execution.
Useful official and professional resources
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Canada Revenue Agency — Selling a business and capital gains deduction guidance.
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CRA T4037 / Capital gains guide (technical details on reporting and the LCGE).
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Practical law/tax firm summaries on share vs asset sales (examples: BDO, law firm articles).
