Selling Your Business: Tax Implications of Selling Shares vs. Assets – A Complete Guide by a Montreal CPA Firm Near You

Selling your business is one of the most important financial events of your life. Whether

you are retiring, transitioning to new opportunities, or passing the business to new

owners, the structure of the sale—selling shares vs selling assets—creates

dramatically different tax outcomes. Many owners assume that selling either structure

results in similar taxes, but the difference can amount to hundreds of thousands of

dollars. Choosing the wrong structure can lead to excessive capital gains tax, recapture

of Capital Cost Allowance (CCA), lost access to lifetime exemptions, or double taxation.

Understanding the tax implications of selling a business in Canada is essential for

maximizing after-tax proceeds, avoiding CRA reassessments, and negotiating the

strongest possible deal.

Legal and Regulatory Framework

The tax treatment of business sales in Canada depends on whether the transaction is

structured as a share sale or an asset sale.

Share Sale

A share sale is governed under section 38 and section 110.6 of the Income Tax Act.

• The seller disposes of shares in the corporation.

• Gains are taxed as capital gains (50% taxable).

• If the shares qualify as Qualified Small Business Corporation shares (QSBC), the

seller may use the Lifetime Capital Gains Exemption (LCGE)—over $1,016,836

(indexed).

• No corporate-level tax is triggered.

• Buyer assumes the corporation’s liabilities.

Asset Sale

An asset sale is governed by multiple sections of the Act, including section 54, section

13 (recapture rules), section 20, and section 85 for certain rollovers.

• The corporation sells individual assets—equipment, inventory, vehicles, buildings,

goodwill.

• Seller may face recapture on previously claimed CCA.

• Gains may be taxed as a mix of capital gains, recapture income, and business income.

• Buyer obtains a step-up in asset cost base.

• Proceeds remain inside the corporation, requiring extraction through salary, dividends,

or a wind-up.

These rules form the core of the tax implications of selling shares vs assets in Canada.

Key Court Decisions

Canadian courts have clarified major issues related to business sales.

In Triad Gestco Ltd. v. The Queen, the court reinforced strict QSBC qualification

standards, denying the LCGE because assets were not primarily used in active

business.

In Gillard v. Canada, the court upheld CRA’s refusal to allow LCGE when corporate

purification was done improperly.

In Mara v. Canada, the court ruled that buyers can request asset sales when liability

risks appear high, demonstrating that purchase structure often depends on business

risk.

In McDonald v. Canada, recapture from depreciable assets was upheld despite the

seller claiming capital gains treatment.

These cases show that structuring a business sale requires meticulous planning and

compliance.

Why CRA Targets This Issue

CRA closely reviews business sale transactions because they involve large tax amounts

and high risk of misclassification. CRA focuses on:

• claims for the LCGE that do not meet QSBC criteria

• attempts to avoid recapture tax through artificial restructuring

• improper purification of corporations before sale

• share sales where the corporation holds too much passive investment income

• inflated goodwill valuations in asset sales

• unreported sales of private corporations discovered through corporate registries

CRA also reviews transactions where family members transfer shares prior to a sale to

multiply the LCGE—an area where CRA applies intense scrutiny. Because selling your

business can create significant tax reductions, CRA enforces strict compliance.

Mackisen Strategy

At Mackisen CPA Montreal, we provide complete tax planning and transaction support

for business sales. Our structured approach includes:

• evaluating whether a share sale or asset sale produces the best tax outcome

• determining QSBC eligibility and preparing the corporation for LCGE use

• performing corporate purification to remove passive assets

• valuing goodwill, equipment, inventory, and intangible assets

• calculating potential recapture and capital gains under each scenario

• negotiating tax-efficient purchase agreements with lawyers and brokers

• structuring earn-outs, vendor notes, or Section 85 rollovers

• planning post-sale withdrawal strategies to minimize tax for sellers

Our comprehensive planning ensures sellers maximize after-tax proceeds and avoid

costly surprises.

Real Client Experience

A manufacturing business owner planned to sell assets only. After analysis, we

determined the shares qualified for the LCGE and restructured the deal. The owner

saved more than $300,000 in tax.

Another client sold assets inside the corporation but did not plan for recapture. CRA

assessed a large tax bill. We corrected asset classes, reallocated proceeds, and

minimized the recapture.

In a third case, a corporation with investment assets did not initially qualify as a QSBC.

We performed a corporate purification—selling passive assets and reorganizing

accounts—successfully qualifying the shares for the LCGE.

These cases show why professional planning is essential when selling your business in

Canada.

Common Questions

Business owners often ask whether buyers prefer share or asset sales. Buyers usually

prefer assets for reduced risk; sellers prefer shares for tax savings.

Others ask whether QSBC status can be created after the fact. Yes, with proper

purification—but timing is crucial.

Some ask whether goodwill is taxed at capital gains rates. Yes—goodwill is a capital

asset but can trigger recapture if improperly allocated.

Another question: Do share sales avoid GST/HST? Yes—share sales are exempt. Asset

sales may require GST/HST unless exemptions apply.

These questions highlight why understanding the tax implications of selling your

business is crucial for maximizing after-tax proceeds.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps

business owners navigate one of the most important financial decisions of their

life—selling a business. Whether you are structuring a share sale, preparing for LCGE

eligibility, or minimizing recapture on an asset sale, our expert team ensures precision,

transparency, and protection from audit risk.