Part II - Selling Your Business: Shares or Assets? A Tax-Smart Guide
Disclaimer: This guide offers general insights to help you understand your options. Tax rules can change, and every business is unique; therefore, professional advice is essential to avoid costly mistakes.
Selling or buying a business is a big step! One key decision is whether to go with a share sale (selling the whole company through its shares) or an asset sale (selling just specific parts like equipment or customer lists). This choice affects taxes, risks, and how much money you end up with. At Venter Accounting & Tax, we help people like you make these decisions easier and more profitable. Whether you're a seller looking to maximize your payout or a buyer wanting a clean start, this guide breaks it down in plain English. We'll highlight the benefits for both sides and spotlight the Lifetime Capital Gains Exemption (“LCGE”), a huge tax saver for sellers.
The BasicS: Share Sale vs. Asset Sale
Share Sale: You sell the company's shares, handing over the entire business – including all assets, debts, and history. It's like selling the whole house, furniture and all.
Asset Sale: You pick and choose what to sell, like equipment, inventory, or goodwill. The buyer gets only what they want, without the old baggage.
Sellers often love share sales for big tax breaks, while buyers prefer asset sales to dodge risks and get better tax perks. But don't worry – negotiations can bridge the gap, like bumping up the price to make everyone happy. Working with a tax expert early can help you crunch the numbers and pick the winner.
Example: Imagine a Canadian tech business worth $1.5 million. As a seller in a share sale, you could use the LCGE to skip taxes on up to $1.25 million (2025 limit), paying only on the rest. In an asset sale, taxes might hit harder, but you could negotiate a higher price to cover it. Buyers in an asset sale get to "reset" asset values for bigger future tax deductions. These are simplified scenarios; your results could vary based on factors like your province or business type—consult a tax specialist for personalized calculations.
Key Things to Think About
Before deciding, consider:
Structure: Pure share, pure asset, or a mix (hybrid)?
Timing: Close the deal right away or later?
Who’s Involved: Family, employees, or outsiders?
History: Any old taxes, lawsuits, or other issues?
Now, let's dive into each option, highlighting benefits for sellers and buyers.
Share Sale: Great for Sellers' Tax Savings, But More Risk for Buyers
In a share sale, the buyer steps into your shoes, taking the good (assets) and the bad (debts and past problems).
Benefits for Sellers:
Huge Tax Win with LCGE: If your business qualifies, you can avoid taxes on up to $1.25 million of gains per owner (2025 limit, adjusted for inflation). That's like keeping an extra $300,000+ in your pocket!
Family Perks: If shares are in a trust, multiple family members can each claim the LCGE, multiplying your savings.
Easy Process: Sell everything at once – no need to list every little item.
Benefits for Buyers:
Simpler Ownership Transfer: You get the whole company, including contracts and history, without renegotiating everything.
Watch Outs:
Sellers: Big gains might trigger Alternative Minimum Tax (“AMT”), but it's often recoverable later.
Buyers: You inherit all risks, so expect deep checks (due diligence) on taxes, legal stuff, and more.
To qualify for LCGE, your company must be a Qualified Small Business Corporation (“QSBC”). Basically, a Canadian private business focused on active operations.
Do You Qualify for LCGE? A Quick Check
The LCGE is a game-changer for sellers, shielding up to $1.25 million from taxes. To grab it, meet these three rules:
Conditions:
Assets and Holding
At sale time, 90%+ of your company's assets must be used in an active Canadian business. You need to be a Canadian resident and report it properly.
24-Month Ownership
You've owned the shares for at least 2 years, with no major changes.
24-Month Assets
For 2 years before sale, 90%+ of assets were used in the business.
Meeting these tests often requires in-depth asset reviews—our free consultation can quickly assess if you qualify.
Qualifying Assets (these help you meet the 90% test): Cash or near-cash used in operations, accounts receivable, loans if lending is your business, short-term mortgages for developers, real estate used in primary operations.
Non-Qualifying Assets (avoid these exceeding 10%): Excess cash, advances to shareholders, loans to related persons, capital assets not used in the business, value of life insurance policies.
These are common examples, but hidden issues can trip you up. We specialize in spotting and fixing them.
Curious if LCGE applies to you? Email us at dave@venter.ca for a quick eligibility check—no obligation.
Asset Sale: Buyer-Friendly with Tax Perks, But More Tax Work for Sellers
Here, you're selling pieces of the business, so the buyer cherry-picks what they want and leaves the rest behind.
Benefits for Buyers:
Skip the Risks: Avoid old debts, lawsuits, or tax issues – start fresh!
Tax Boost: Reset asset values higher, unlocking bigger deductions and depreciation to save on future taxes.
Flexibility: Only buy what you need, like key equipment or customer lists.
Benefits for Sellers:
Tax-Free Payouts: Gains can build your Capital Dividend Account (CDA), letting you pay tax-free dividends to shareholders.
Use Losses: Offset sale taxes with past business losses.
Higher Price Potential: Buyers might pay more since they get those sweet tax deductions.
Watch Outs:
Sellers: Taxes vary – capital gains (50% taxable), full business income on inventory, or "recapture" on depreciated assets.
Buyers: Might need to take over employee contracts under labor laws.
Both: More paperwork, like detailed asset lists and price breakdowns.
Pro Tip: Sellers, allocate the sale price smartly across assets to minimize taxes. Buyers, use this to exclude headaches.
Hybrid Sales: A Mix for Balance (But Proceed Carefully)
A hybrid combines share and asset elements – like selling shares but keeping some assets separate. It can blend benefits but risks extra taxes or scrutiny from the Canada Revenue Agency (CRA).
Plan Smart to Win Big
Whether buying or selling, start early – at least a year ahead:
Sellers: Check LCGE eligibility, clean up assets, and model tax scenarios. These strategies sound simple, but involve tax traps; let us model them for you.
Buyers: Weigh risks vs. tax perks and negotiate for the best fit.
Both: Compare structures, push for fair prices, and consider hybrids if they make sense.
The right choice can save you thousands (or more) in taxes and headaches.
Ready to Make Your Move? Contact Us Today to Begin Planning Ahead!
At Venter Accounting & Tax, we're experts in making business sales tax-smart and stress-free. We've helped countless buyers and sellers navigate share vs. asset deals, unlock LCGE benefits, and close with confidence. Get personalized advice to boost your bottom line.
Don't leave money on the table. Contact Venter Accounting & Tax today for your free consultation. Call (778) 215-4695 or email dave@venter.ca now.
Quick Comparison: Share vs. Asset Sale
| Aspect | Share Sale | Asset Sale |
|---|---|---|
| Who Loves It? | Sellers (big tax savings via LCGE) | Buyers (avoid risks, get tax deductions) |
| What's Sold? | Whole company via shares | Specific items like gear or inventory |
| Seller Taxes | Mostly capital gains (50% taxable); LCGE up to $1.25M. Watch for AMT. | Mix of gains, income, or recapture; use CDA for tax-free dividends. |
| Buyer Taxes | Stuck with old asset values. | Higher values mean bigger future deductions. |
| Risks | Buyer takes all liabilities. | Buyer skips most. |
| Eligibility | Needs QSBC and 24-month tests for LCGE. | No special tests; taxes based on assets. |
| Planning | Purify assets to qualify for LCGE. | Allocate prices; exclude bad assets. |
| Employees | Staff stays with the company. | Laws might transfer them automatically. |
| Complexity | Lots of due diligence. | Detailed lists and approvals. |
