Share sale vs asset sale Canada: deal structure basics

What changes hands in each type of sale?

A share sale transfers the shares while the corporation continues to own its property and carry its contracts, licenses, tax history and liabilities. An asset sale transfers only the property selected by the buyer; the seller retains the corporation and what the agreement leaves out.

That difference reaches beyond the transfer documents. A share transaction carries the corporate record with the operating business, while an asset deal requires the parties to specify what moves. The structure requirements help frame the issues that must be addressed before signing.

How should I compare the tax and buyer exposure?

Compare the seller's tax result, liabilities, contract and license continuity, and the buyer's financing capacity. Neither route is automatically preferable: a favorable result on one point does not resolve the other parties' constraints or the work needed to complete the transfer.

An offer still depends on how business earnings are presented and tested. The valuation method requirements relate to that framing, while a due diligence comparison shows matters a buyer may investigate. Identify liabilities, consents and required property before comparing structures.

Which practical differences matter most?

The main differences concern tax, liabilities, tax basis, agreements, employees, the potential buyer pool and closing work. A share sale keeps the corporation and its obligations together; an asset sale lets the buyer select property. The table compares the consequences that can shape the parties' decision.

The CRA's corporate tax return guidance describes T2 filings after a transaction, while an individual seller reports a share gain on a personal return. Filing treatment is only one part of the choice: liabilities, continuing agreements, financing and tax by asset class can also influence which form works.

When could a seller prefer a share sale?

A share sale may suit a seller when the corporation has a clean history and the buyer wants its existing contracts, licenses and employees to continue within the same legal entity.

It can also fit where the seller may claim the lifetime capital gains exemption on qualified small business corporation shares.

That possible exemption is set out in section 110.6 and may shelter a large part of a qualifying gain. The seller should still expect warranties, indemnities and possibly a holdback. A buyer that needs an existing provincial license may accept more exposure to the corporation's history. Broker fees may vary with transaction form.

Why might a buyer ask for an asset sale?

An asset purchase may appeal to a buyer who wants to avoid unknown corporate liabilities, or where the corporation has a troubled history. It may also suit a seller with no exemption room, or with a low share cost base that could produce a large taxable gain.

The buyer chooses property and receives a stepped-up cost base in the acquired assets, while the seller retains the corporation and its cash, debts and unsold property. A possible drawback is double taxation: tax on the corporate sale followed by personal tax when funds are distributed.

Could a lease or license determine the choice?

Yes. A lease, supply or franchise agreement, or a provincial license can outweigh a preferred tax result. A change-of-control term may apply to a share sale and give a counterparty a right to terminate or demand consent as the deal approaches closing.

An asset deal avoids that particular change-of-control trigger, but the buyer must arrange assignment or reissue of each wanted contract or license. In the Winnipeg machine shop example, the landlord can terminate after a change of control, while an asset buyer can seek a new lease. The existing agreement therefore affects which form works.

The seller in that scenario would give up the corporation's existing agreements and must deal with any the buyer leaves behind. A share transaction could suit the seller if the exemption covers most of the gain and landlord consent is obtained. The example shows why checking transfer terms early matters, before tax preference determines the structure.

Can a different structure fix a weak business?

No. Changing structure does not improve underlying value, cash flow or customer concentration. A lender assesses the same cash flow regardless of proposed form, so earnings still limit both the potential price and the debt the business can support.

Weak records, hidden liabilities or a lease that cannot be assigned can undermine either route. Such issues may reduce confidence in a share purchase or stop an asset transfer. The seller preparation comparison focuses on getting the file ready for review, but due diligence remains relevant whichever form the parties consider.

Does an asset sale always add GST/HST?

Not always. A share sale is a supply of a financial instrument and is exempt from GST/HST. An asset sale may attract GST/HST on taxable supplies unless an exemption applies or the parties make a going concern election under section 167 of the Excise Tax Act.

That election requires a registered buyer, a written election and the sale of substantially all assets used in the business. The seller should also calculate tax by asset class, including depreciation recapture, and consider provincial sales tax. These amounts can change the seller's proceeds even if the buyer's stated price does not change.

The buyer cannot claim the seller's lifetime capital gains exemption, which belongs to an individual holding qualified small business corporation shares. The buyer would have to meet the conditions for an exemption on a later sale. Check the seller's available exemption room before choosing, while separately weighing liability exposure and continuity of contracts.

What liabilities and closing work should I check?

An asset buyer usually takes only debts identified in the agreement, leaving other liabilities with the seller. Successor liability rules are exceptions: employment standards, environmental and tax statutes in several provinces may make the buyer responsible for particular obligations, even where the purchase agreement allocates them differently.

The parties should list assumed liabilities and investigate obligations that may arise by statute. An asset purchase narrows what the buyer agrees to accept, but it does not guarantee that every obligation stays with the seller or corporation. Confirm the scope before the agreement allocates responsibility.

The work at closing also differs. Wanted contracts may require extra effort in an asset sale, while a share sale often calls for more warranties and tax clearances. Financing can rule out a form despite its tax appeal, so confirm the buyer's funding constraints early.

A vendor take-back note changes when payment arrives, so check its tax treatment before finalizing terms. The stated price is not the entire bargain: payment timing, assumed liabilities and included property also shape the transaction for both buyer and seller.

What should I do first?

Start by writing down what has to transfer, then compare the seller's tax outcomes with the buyer's liability and financing limits. Listing those constraints before settling on a form keeps tax, agreements and funding in the same decision.