Asset Sale vs. Share Sale in Canada (2025): Tax, Liability & Process Explained

When engaging in the purchase or sale of a privately held company in Canada, buyers and sellers must decide between two primary transaction structures: asset sales and share sales. Each structure carries distinct legal, tax, and practical implications that can significantly influence the overall transaction. Understanding these differences is essential to structuring a deal that aligns with your goals.

What Is an Asset Sale?

An asset sale involves purchasing the individual assets of a business. In this arrangement, assets are extracted from the existing corporation and transferred to a new corporation or buyer entity. Typical assets sold include:

inventory
furniture, fixtures, and equipment
customer lists and supplier lists
goodwill
accounts receivable and accounts payable
trade names and contracts
leasehold improvements
licences and permits
domain names and telephone numbers

Advantages of an Asset Sale

The primary benefit is that the buyer can choose the specific assets and liabilities they wish to acquire, leaving behind unwanted liabilities. Typically, a buyer acquires operational assets and necessary liabilities such as accounts payable and contractual obligations. Larger liabilities such as lines of credit or term loans remain with the seller and are usually paid from the sale proceeds.

Administrative Considerations

Asset sales are more administratively intensive. Every asset must be identified, valued, and transferred individually. This includes contract assignments, permit transfers, and real property conveyances. For example, if a target business owns 10 delivery vehicles, each must be individually certified, insured, taxed, and transferred at ServiceOntario.

Third-Party Consents

Because assets such as contracts and leases do not automatically transfer, third-party consents may be required. If significant contracts are tied to the value of the business, this may influence whether a share sale is more appropriate.

Employee Considerations

Employees are not considered assets and do not automatically transfer in an asset sale. The seller must terminate employment relationships, and the buyer must issue new employment agreements. This may trigger:

severance obligations
termination pay under the Employment Standards Act or provincial legislation

Tax Considerations in an Asset Sale

Buyers generally benefit from:

a step-up in the tax basis of acquired assets
potential for increased depreciation deductions

However, allocation of the purchase price can create opposing interests:

Buyers prefer high undepreciated capital cost (UCC) for future deductions.
Sellers prefer lower allocation to minimize capital gains and avoid recapture.

GST/HST applies on asset sales unless both parties file a section 167 GST44 joint election under the Excise Tax Act, where eligible.

Finally, the target corporation pays tax on internal gains from the sale of assets. Because the vendor is usually a corporation, two levels of tax often arise:

corporate-level capital gains
shareholder-level tax when extracting proceeds, except to the extent of the Capital Dividend Account

A share sale involves purchasing the shares of the corporation that owns the business. Here, the buyer steps into the seller’s place as the owner. The corporation itself remains unchanged.

Advantages of a Share Sale

The buyer acquires all assets and liabilities automatically.
Corporate contracts, licences, and permits remain intact without separate transfers.
Employees remain employed by the same legal entity—no need to renegotiate employment contracts.

Liability Considerations

While sellers prefer share sales because they transfer all liabilities to the buyer, indemnities and holdbacks are commonly negotiated to protect the buyer against unknown liabilities.

Tax Considerations in a Share Sale

Sellers generally prefer share sales because they may qualify for the Lifetime Capital Gains Exemption (LCGE), allowing each individual shareholder to shelter up to $1,250,000 in gains (subject to Income Tax Act requirements).

From the buyer’s perspective, share purchases may be less attractive because:

There is no step-up in the tax basis of corporate assets.
Low UCC on assets reduces future depreciation.
Low adjusted cost base (ACB) with high fair market value (FMV) means large future internal capital gains.

Buyers may negotiate a reduced purchase price to account for this.

Feature	Asset Sale	Share Sale
Liabilities	Buyer selects liabilities	Buyer inherits all liabilities
Tax Basis Step-Up	Yes	No
Employee Transfer	Must be rehired	Automatically continues
Complexity	More administrative work	Simpler
Seller Preference	Less preferred	Strongly preferred (LCGE benefit)
Buyer Preference	More preferred	Less preferred

In general:

Buyers prefer asset sales to control liabilities and improve tax outcomes.
Sellers prefer share sales for a cleaner exit and potential LCGE benefits.

Conclusion

Choosing between an asset sale and a share sale requires careful evaluation of tax outcomes, liabilities, employee implications, and deal complexity. Both buyers and sellers should seek legal advice tailored to their unique circumstances.

If you are buying or selling a business in Canada and need guidance on the right transaction structure, contact Kalfa Law Firm to speak with an experienced corporate lawyer.

FAQs:

What is the main difference between an asset sale and a share sale in Canada?

An asset sale involves purchasing specific business assets, while a share sale involves purchasing the shares of the corporation that owns the assets. In an asset sale, the buyer chooses which assets and liabilities to acquire. In a share sale, the buyer acquires the entire corporation, including all assets and liabilities.

Which is better for tax purposes: an asset sale or a share sale?

It depends on whether you are the buyer or seller. Buyers generally prefer asset sales because they can step up the tax basis of acquired assets. Sellers prefer share sales because they may qualify for the Lifetime Capital Gains Exemption (LCGE), which shelters up to $1,250,000 in gains.

Do employees automatically transfer in an asset sale?

No. Employees do not automatically transfer in an asset sale. The seller must terminate their employment, and the buyer must offer new contracts. In a share sale, employees remain employed by the same corporation without interruption.

Is GST/HST charged on an asset sale in Canada?

Yes, GST/HST generally applies to asset sales unless the buyer and seller jointly file a section 167 GST44 election under the Excise Tax Act, which may exempt the transaction where criteria are met.

How do I choose between an asset sale and a share sale?

The best structure depends on tax considerations, liability concerns, contract requirements, and negotiation leverage. Buyers usually prefer asset sales, while sellers prefer share sales. A corporate lawyer can help determine the optimal structure.

Shira Kalfa, BA, JD, Partner and Founder

Shira Kalfa is the founding partner of Kalfa Law Firm. Shira’s practice is focused in corporate-commercial and private M&A law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law.

The above provides information of a general nature only. This does not constitute legal or accounting advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.