Asset Sale vs. Share Sale in Canada: A Tax and Legal Guide
When buying or selling a privately held business in Canada, the single most consequential structural decision is whether the transaction will proceed as an asset sale or a share sale. In an asset sale, the buyer acquires specific assets of the business inventory, equipment, contracts, and goodwill, leaving the corporate shell with the seller. In a share sale, the buyer acquires the shares of the corporation that owns the business, stepping into the seller’s position as the new owner of the legal entity and everything it contains.
The two structures produce materially different tax outcomes, allocate liabilities differently, and carry different obligations with respect to employees, contracts, and regulatory licenses. Buyers almost universally prefer asset purchases, sellers almost universally prefer share sales. The gap between those preferences is the central negotiating tension in most private M&A transactions, and how that gap is bridged through price adjustments, hybrid structures, or other mechanisms often determines whether a deal closes.
What Is an Asset Sale?
An asset sale is a transaction in which a buyer acquires specific identified assets of a business, rather than the legal entity that owns those assets. The seller in an asset sale is the corporation itself not the individual shareholders. The buyer and seller negotiate which assets are included in the purchase and which liabilities, if any, the buyer will assume.
The assets transferred in a typical asset sale include the inventory of goods held for resale, furniture, fixtures, and equipment, customer lists, supplier relationships, and databases, goodwill and trade names, accounts receivable, leasehold improvements, software licenses and domain names, and in some cases the benefit of existing contracts and leases (subject to third-party consent requirements discussed below). The purchase agreement in an asset sale the asset purchase agreement specifies each category of asset, the agreed value allocated to it, and the mechanics of transfer.
Because the seller in an asset sale is the corporation, the proceeds of the sale flow to the corporation first, and the shareholders receive the proceeds only when the corporation winds down, pays a dividend, or otherwise distributes the funds. This two-step flow from corporation to shareholder creates a tax layering problem that is one of the most important reasons sellers prefer share sales.
What Is a Share Sale?
In a share sale, the buyer acquires the shares of the corporation that owns the business. The corporation itself does not change, its assets, contracts, licenses, and employees remain intact as before. What changes is who owns the shares. The buyer steps into the position previously held by the selling shareholders, and the corporation continues carrying on business under new ownership.
Because the corporation continues as the same legal entity, all of its liabilities continue as well, including known liabilities recorded on the balance sheet and unknown or contingent liabilities that may not surface until after closing. This is the central risk from the buyer’s perspective, unlike an asset purchase, where the buyer selects which liabilities to assume, a share purchase brings every liability the corporation carries, disclosed or otherwise. This risk is managed through representations and warranties in the share purchase agreement, indemnification provisions, holdbacks, and increasingly, in transactions above a certain size, representations and warranties insurance.
The seller in a share sale is the individual shareholder (or shareholders), not the corporation. The sale proceeds flow directly to the selling shareholders. This single level of tax compared to the two levels in an asset sale is one of the primary reasons sellers prefer the share structure.
Why Asset Purchases Are Preferred
From a buyer’s perspective, an asset purchase offers three structural advantages that a share purchase does not.
The first is liability selection. In an asset purchase, the buyer chooses which assets to acquire and which liabilities to assume. Undisclosed liabilities, legacy claims, unremitted payroll or HST, and contingent environmental or employment obligations remain with the seller’s corporation. The buyer starts with a clean slate.
The second is the tax basis step-up. When a buyer acquires depreciable assets, equipment, leasehold improvements, or vehicles in an asset purchase, the purchase price allocated to those assets sets the buyer’s new undepreciated capital cost (UCC) under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (ITA). A higher UCC means higher future capital cost allowance (CCA) deductions and genuine tax savings that reduce the real cost of the purchase. In a share purchase, the UCC of the underlying assets is whatever the selling corporation had accumulated over its history, which is often very low for a mature business. The buyer inherits those low UCC balances and cannot claim the depreciation deductions the asset purchase would have produced.
The third is the absence of inherited tax history. In a share purchase, the buyer acquires a corporation with whatever tax exposures it has accumulated, reassessment risk under ITA s. 152, unremitted HST or payroll source deductions, director liability exposure under ITA s. 227.1 and ETA s. 323, and prior-year misclassification of employees as independent contractors (the test for which comes from Wiebe Door Services Ltd. v. MNR, [1986] 3 FC 553). An asset purchase avoids all of this.
Why Share Sales Are Preferred
From a seller’s perspective, the share structure offers three corresponding advantages.
The most significant is LCGE eligibility. Individual shareholders who sell qualifying shares may shelter a substantial portion of their capital gain using the Lifetime Capital Gains Exemption under ITA s. 110.6. As of 2025, the LCGE allows each eligible individual to shelter approximately $1,250,000 of capital gains on qualified small business corporation (QSBC) shares completely tax-free. For a business with two founding shareholders, each with LCGE room available, the combined exemption can shelter $2,500,000 of gain. The LCGE is available only on a share sale, it does not apply to the sale of assets by a corporation.
For shares to qualify as QSBC shares under ITA s. 110.6(1), several conditions must be met. At the time of sale, the shares must be of a CCPC whose assets are used primarily in an active business, specifically, more than 90% of the fair market value of the corporation’s assets must be used principally in active business operations at closing. In the 24 months before the sale, more than 50% of the FMV of the corporation’s assets must have been used principally in active business. The shares must also not have been owned by anyone other than the individual or a related person during that 24-month holding period. A corporation with significant passive investment savings, marketable securities, or real property unrelated to the business may fail the 90% asset test unless those assets are removed before the sale. Removing passive assets in advance of a share sale is called purification, and it requires its own planning.
The second advantage is the single level of tax. In an asset sale where the vendor is a corporation, tax arises twice, once when the corporation realizes the gain on the sale of its assets and again when shareholders extract the after-tax proceeds from the corporation as a dividend or on wind-up. A share sale produces only one taxable event the gain realized by the individual shareholder on the disposition of shares. Even without the LCGE, this structural advantage often makes the share sale more tax-efficient for sellers.
GST/HST
Asset sales are generally subject to GST/HST under the Excise Tax Act, R.S.C. 1985, c. E-15 (ETA) on all taxable supplies. For a substantial business acquisition, this can represent a significant HST of 13% in Ontario added to the purchase price, which the buyer must either pay upfront (and reclaim as an input tax credit in due course) or finance. Where the acquisition qualifies as the purchase of a business or part of a business as a going concern, the parties can jointly elect under ETA s. 167 (using Form GST44) to have the transfer proceed without HST applying. The election is available when the buyer is registered for GST/HST and acquires all or substantially all of the assets necessary to carry on the business. If the election is not filed or does not qualify, HST applies, and the seller must collect and remit it.
Share sales do not attract GST/HST. Shares are exempt financial instruments under the ETA, so the transfer of shares from seller to buyer occurs outside the GST/HST system entirely. This is a meaningful administrative and cash-flow advantage for share purchases and another reason sellers resist the asset structure.
Different Treatment in Each Structure
The treatment of employees is fundamentally different between the two transaction structures. In an asset sale, employees are not assets they do not transfer automatically to the buyer. The selling corporation must terminate each employee’s employment, which may trigger obligations under the Employment Standards Act, 2000, S.O. 2000, c. 41 (ESA) including notice of termination or termination pay, and, where applicable, severance pay for employees with five or more years of service whose employer has a payroll of $2.5 million or more. The buyer then offers new employment agreements to the employees it wishes to retain. Under the ESA, where an employee is rehired by a buyer in connection with an asset sale within a reasonable period, their prior service with the seller counts toward their entitlements with the buyer meaning years of service do not simply reset at closing.
In a share sale, employees remain employed by the same corporation without interruption. Their employment agreements, benefit entitlements, and years of service carry through under the same legal entity. No termination, rehiring, or new offer letters are required. For buyers, this simplicity is attractive operationally, but it also means the buyer assumes any employment-related liabilities that existed before closing claims for unpaid wages, wrongful dismissal exposure, or obligations under any collective agreement. Under the Labour Relations Act, 1995, S.O. 1995, c. 1, a collective agreement binds a successor employer on the acquisition of a business, which applies to both asset and share transactions where the employees are unionized.
Contracts, Licenses, and Leases
One of the practical complications of an asset sale is that contracts, leases, and licenses do not transfer automatically. Each one must be individually assigned with the counterparty’s consent, or the benefit must be made available to the buyer through some other arrangement. A commercial lease covering the premises from which the business operates, a government license or permit tied to the corporation, or a major supplier or customer contract requiring the counterparty’s consent to assignment can each represent a material obstacle. If a key contract contains a change-of-control clause as many commercial agreements do even a share sale may trigger a consent requirement.
For asset purchases where significant contracts form the core of the business’s value, the failure to obtain third-party consents before closing can leave the buyer with assets but without the relationships that give those assets their value. Due diligence in an asset transaction must therefore include a systematic review of every material contract for assignment restrictions and change-of-control triggers so that consents can be obtained or the transaction structure modified before closing. The same analysis applies in a share transaction to identify which contracts have change-of-control provisions that might require notice or consent, even though the legal entity itself has not changed.
Allocating the Purchase Price in an Asset Sale
In an asset sale, the purchase price must be allocated among the individual categories of assets transferred, and that allocation has significant and opposing tax consequences for buyer and seller. Under ITA s. 68, where a transaction involves the disposition of several properties for a single price, the proceeds are allocated on a reasonable basis to each property.
From the buyer’s perspective, allocating a higher price to depreciable assets equipment, leasehold improvements, vehicles produces a higher UCC and therefore more future CCA deductions. Allocating price to goodwill and other eligible capital expenditures (now treated under the ITA as intangible depreciable property in Class 14.1) also generates future deductions, though at a lower rate. From the seller’s perspective, allocation to fully depreciated depreciable assets triggers recapture of previously claimed CCA under ITA s. 13 taxable as income, not as a capital gain. Sellers therefore prefer allocations that minimize the depreciable asset categories and maximize goodwill (which is taxed as a capital gain). The opposing interests on allocation are predictable, and negotiating the allocation schedule is a standard part of every asset purchase agreement.
Where the parties cannot agree on allocation or agree on an allocation that is unreasonably skewed, the CRA has the authority to reallocate proceeds under ITA s. 68 to reflect fair market value. In practice, most asset purchase agreements include a mutually agreed purchase price allocation that both parties will use for tax reporting purposes.
Bridging the Gap Between Price Adjustments, Hybrids, and Other Mechanisms
Because buyer and seller preferences for structure are almost always opposed, transactions regularly involve mechanisms to bridge the gap in net after-tax proceeds between the two structures.
The most common approach is a price premium. A seller who insists on a share sale may accept a modestly lower price than they would for an asset deal, or a buyer who demands an asset purchase may offer a price premium to compensate the seller for the additional tax cost of the asset structure. The size of the premium is a function of the seller’s marginal tax rate, LCGE availability, and the magnitude of UCC step-up the buyer would receive in an asset deal.
A hybrid transaction structures part of the consideration as a share purchase and part as an asset purchase, for example, buying the shares of the operating company while leaving certain real property or investment assets with the seller, who sells those separately. Hybrid structures require careful analysis to avoid unintended results under both the ITA and the ETA.
A Section 85 rollover is sometimes proposed by buyers as a way to obtain an asset purchase while reducing the seller’s tax cost. Under ITA s. 85, a seller can transfer assets to a buyer’s corporation at an elected amount below fair market value, deferring tax on the portion of the gain above the elected amount. The mechanism requires filing Form T2057 and works best where the seller is willing to receive shares of the buyer’s corporation as partial consideration. It is sophisticated, and the anti-avoidance rule in ITA s. 84.1 must be considered carefully where related-party elements are present.
Non-Compete Agreements and Earnouts
Both asset and share transactions commonly include a non-compete agreement a commitment by the selling principals not to compete with the business for a defined period in a defined geography. In a share sale, the non-compete binds the selling shareholders directly, since they are the parties to the share purchase agreement. In an asset sale, the non-compete binds the selling corporation, but the buyer typically also requires the principals of the corporation to personally covenant not to compete, since a corporate non-compete can be circumvented.
For tax purposes, payments received by an individual under a non-compete agreement are treated as proceeds of disposition of property, taxed as ordinary income rather than as a capital gain, under the ITA amendments to non-compete treatment enacted in 2017. Buyers should ensure that non-compete payments are properly structured and documented to avoid inadvertently creating income where capital treatment was expected.
Earnout provisions, where a portion of the purchase price is contingent on post-closing performance, are common in both structures where the business’s future earnings are uncertain. Earnouts raise their own tax issues, including when proceeds are recognized and how the contingency amount is treated if the target is met or not met. Legal advice specific to the earnout structure is advisable for any transaction where a material portion of the price is deferred.
The choice between an asset sale and a share sale is one of the most consequential decisions in any business transaction. Getting the structure right for your tax position, your liability exposure, and your deal timeline requires advice before the letter of intent is signed, not after. The structure of the transaction is rarely renegotiable once heads of terms are agreed.
At Kalfa Law we advise buyers and sellers on the full spectrum of business purchase and sale transactions, from structuring the deal and drafting the letter of intent through due diligence, purchase agreement negotiation, and closing. We work alongside your tax advisers to ensure the structure achieves what you need it to achieve, whether that is LCGE eligibility, a clean break from liabilities, or a price that reflects the true after-tax economics on both sides. Contact us at (416) 631-7227 or book a consultation online.
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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.
© Kalfa Law Firm , 2025. Updated September 23, 2026.
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.
