Phone Phone
Asset sale vs. Share sale

Asset sale vs. Share sale

There are two ways to purchase or to sell a business – an asset purchase or a share purchase. It is a misnomer to think that an asset purchase is a purchase of only part of a business. In both instances, the entire business is sold. The difference is a legal one.

An asset transaction is the purchase of a business’s assets. Here, we are procuring and stripping the assets out of a corporation and then once purchased, placing those assets into a fresh corporation. The ‘assets’ we refer to are inventory, equipment, customer lists, supplier lists, goodwill, accounts receivable, accounts payable, trade-names, contracts – everything that comprises the business is stripped and purchased.

A share sale is essentially a purchase of the ownership of the corporation through which the business is run. 

Keep in mind, the concept of a business and the concept of a corporation are distinct. A business is a particular revenue stream – for example, selling fruit. In Ontario, you may choose to run your business of selling fruit through one of three different vehicles: 1) Sole Proprietorship; 2) Partnership and 3) Corporation. A corporation then, is merely the vehicle through which you run your business. In an asset sale, we are buying the business (the inventory of fruit, the customer list, the supplier list, and leasehold improvements) separate and apart from the vehicle of the corporation; in a share sale, we are buying the shares of the corporation through which the business is run.

Deciding between an asset sale and share sale is a complicated matter because more often than not the parties involved would benefit from opposing structures. Typically, a vendor (seller) prefers to sell shares and a purchaser prefers to purchase assets. However, the ultimate preference lies within the tax consequences and potential liabilities of each proposed structure. 

It is important to note that if the business is a sole proprietorship or a partnership, it cannot be structured as a share transaction as neither of the entities possess shares.  However, it is possible to incorporate a corporation and rollover the sole prop or partnership to the new corporation immediately prior to the sale. In most circumstances, there are significant tax advantages of selling shares and so this last-minute tax planning is often utilized.  


An asset sale is a sale of individual assets of a business such as equipment, fixtures, goodwill, trade names, telephone number, inventory, leasehold and licenses. In this type of transaction, the purchaser is typically able to select only those assets it wishes to buy and can choose which liabilities it wishes to assume however in ordinary course, the purchaser typically acquires all of the assets of the business and all of its liabilities to the extent it relates to the operation of the business. Prior liabilities such as line of credits or loans remain the liability of the seller and are typically paid out from the proceeds of closing to the extent the associated liens attach to the assets under sale.

The predominant reason why a purchaser wishes to purchase assets is because it is able to identify each individual asset and liability it wishes to procure; it does not acquire unknown or prior liabilities of the corporation such as its tax liabilities or employment liabilities.

As far as tax implications, a purchaser will want to acquire assets at the highest possible undepreciated capital cost (UCC). The UCC is the current value of the depreciable assets which have been previously recorded on the corporation’s tax return after the depreciation deductions for that year. The higher the UCC, the greater future deductions available to the purchaser when it carries on the business. Conversely, a seller will generally desire a lower allocation as this will dictate the capital gains tax triggered on the sale. As well, a seller will not wish for the purchase price of the assets to be allocated amongst its assets in an amount greater than the UCC as this will trigger a penalty tax called recapture.

In some circumstances, a purchaser may feel it is advantageous to purchase the shares of a business rather than its assets because the UCC of the assets is nearly NIL. This eliminates a substantial deduction for the business moving forward, which essentially increases the business’ taxable income. In such a circumstance, the purchaser will prefer the shares of the corporation over its assets in the hopes they can one day enjoy the Lifetime Capital Gains Exemption on an eventual sale.

Complications of Asset Sale

  • Tax Implications: The reason why a vendor would prefer not to sell assets is because in an asset sale there are two levels of taxation: (1) at a corporate level, and (2) at a shareholder level when the corporation distributes the after-tax proceeds to the shareholders as a dividend, which is taxable.
  • Employment Contracts: Additionally, employment contracts cannot automatically be assigned to the purchaser under an asset transaction. There are further implications under the Ontario Labour Relations Act 1995 if employees are unionized.  As such, it is sometimes important to consider whether a share acquisition would be a better structure since it would allow for the automatic acquisition of personnel without assignment.
  • Vehicles: The same considerations occur when the business under sale possesses vehicles or trucks. Assignment of each vehicle and CVOR license is at an enormous tax cost and administrative burden to both parties, as well as the regulatory burden of tending to Ministry of Transportation consent. In some circumstances, taxes aside, it is far more beneficial to sell shares to avoid all sorts of adverse consequences of an asset sale.
  • Undepreciated Capital Costs (UCC): The value of undepreciated capital costs potentially poses a problem for the seller. If the assets are sold over and above the undepreciated capital cost (UCC), recapture comes into play. Recapture is a tax penalty that the CRA levies whenever assets are sold for more than its UCC.


asset sale

By virtue of acquiring shares of a corporation, the purchaser, in simple terms, is acquiring the corporation itself including inter alia its underlying assets, liabilities (known and unknown). This is mainly why the vendor would prefer to sell the shares of the corporation in order to avoid being left with unwanted assets and liabilities. Additionally, and most importantly, the vendor can enjoy the tax advantage of the Lifetime Capital Gains Exemption- subject to availability under Income Tax Act.

Advantages of Share Sale

  • The Lifetime Capital Gains Exemption
    From a tax perspective, it is beneficial for a seller to sell the shares of a small business rather than its assets if certain conditions are met. If the vendor corporation is a Canadian Controlled Private Corporation (CCPC) of which over 90 percent of its assets are active within the business at the time the individual is claiming the exemption, and the seller is an individual who has held the shares of the corporation for at least 24 months prior to the sale, the gain from the sale of the shares are exempt from taxation pursuant to the Lifetime Capital Gains Exemption (LCGE). The Lifetime Capital Gains Exemption allows a business owner an exemption of up to $892,218 (2021) on the sale of qualifying shares.
    Aside from the Principal Residence Exemption on the proceeds of the sale of one’s principal residence, the Lifetime Capital Gains Exemption is the only other capital gains exemption available to taxpayers in Canada.
    The LCGE is an excellent tax planning and tax saving tool. For more information about the LCGE, read Lifetime Capital Gains Exemption.
  • Limited Liability
    In addition to the Lifetime Capital Gains Exemption, a seller who sells shares of a business or corporation enjoys the benefit of limited liability. Shares of a private corporation that has been active in the marketplace are usually saddled with liability – both known and unknown at the time of sale. On face value, by selling the shares of a corporation, the seller effectively transfers all of its liability along with the sale. However, standard indemnities in the context of an ordinary small business transaction shift the natural operation of law. Here, the seller will provide a purchaser with an indemnity relating to all pre-closing liabilities such that if any liability does rear its head after the sale, the seller will remain liable. Without the additional indemnity however, the seller would walk away without any ensuing liability.

Implications for the Purchaser

Tax Cost of Non-Depreciable Capital

By acquiring the shares, the purchaser will inherit the tax cost of the non-depreciable capital and depreciable capital assets respectively of the corporation and can only continue to claim tax deductions based on the existing tax cost of the assets inside the corporation. If the UCC on depreciable assets have all been written down, there is no room for further deductions which will increase the taxable income of the corporation. More than this, consider the circumstance where an operating corporation owns the real property on which its manufacturing plant is situate. The corporation purchased the real property 25 years ago for $400,000. The value of the real property at present date is $2,500,000. When we sell the shares of the corporation, the buyer is inheriting a pregnant or bloated capital gain. While the value of the asset is $2,500,000, if the buyer were to later sell the real property, it must pay gains tax on the differential between $400,000 and $2,500,000 as it inherited this tax cost – a capital gain of $2,100,000 amounting to a tax liability of approximately $525,000. These considerations must be assessed when purchasing shares. If assets were acquired, the tax would be triggered and paid by the seller and not shifted to the buyer as a bloated and inevitable cap gain which discount the value of the underlying assets.

In a share purchase transaction, the full purchase price is added to the purchaser’s Adjusted Cost Base (ACB) of the purchased shares. Shares are a type of non-depreciable property and therefore there are no tax deductions available in future years against the income of the purchaser associated with the costs of the shares. The purchaser will be able to regains its ACB on a subsequent disposition of the shares. 

Despite the aforementioned, there are instances in which the vendor may prefer an asset sale such as where the vendor has substantial non-capital or net capital loss carryforward available that can be used against or to offset any income or capital gains arising from sale of the assets of its business. Similarly, a purchaser may prefer a share purchase, for instance, when the fair market value of the assets is less than its tax costs.


In either case it is imperative that you hire a qualified lawyer with experience in both assets base transactions and share based transaction in order to maximize your benefits in any given matter. Whether you are looking to sell the assets of your business or your shares, we are here to help you. Call one of our business lawyers at Kalfa law to discuss.

You have worked hard for your business, let us make sure you get to enjoy the benefits.

-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 tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax FoundationWomen’s Law Association of Ontario, and the Toronto Jewish Law Society. 

© Kalfa Law Firm 2020

The above provides information of a general nature only. This does not constitute legal 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.

Speak with a trusted business lawyer today.

    Send us a message, but doing so does not mean that we are your lawyers until we have confirmed so in writing. Please do not include any confidential information in your message.
    Close Menu

    Book an Appointment 1-800-631-7923

    Call Us
    Speak with a Lawyer

    Email Us