Considering Selling Your Business? Know The Tax Implications

UPDATE (December 5, 2025): This article has been updated to reflect changes in legislation, regulations, and accounting practices since the original date of publication (May 14, 2021).

Are you considering selling your business? The sale of your business can be as exciting as it is stressful. It’s important to understand the options available to you and the tax implications of different choices. At DMCL, we help business owners navigate these decisions and maximize the after-tax value they realize from a sale.

In Canada there are two primary approaches to selling a business: a sale of the shares of the corporation, or a sale of the business assets. Each has distinct tax outcomes and affects both buyers and sellers differently.

Two approaches to selling your business

Share sale

When selling shares any gain will likely be a capital gain, one-half of which will be sWhen selling shares of a corporation, any gain is generally treated as a capital gain, of which 50% is included in income for tax purposes. A key tax benefit for individual sellers is the Lifetime Capital Gains Exemption (LCGE).

For dispositions after June 24, 2024, the LCGE limit for qualified small business corporation shares (and qualified farm or fishing property) is $1,250,000. This means up to $1,250,000 of capital gains may be sheltered from tax, subject to eligibility conditions.

Because only 50% of capital gains are taxable, a full $1.25 million exemption could shield up to $2.5 million in total capital gains from tax if you have not used any of your LCGE previously.

LCGE Eligibility Criteria

To qualify for the LCGE on the sale of Qualified Small Business Corporation (QSBC) shares, the following rules generally apply:

• The company must be a Canadian-controlled private corporation (CCPC).
• More than 50% of the fair market value of the corporation’s assets must have been used in an active business in Canada throughout the 24 months immediately before the sale.
• During that same period, the shares must have been owned by the seller (or related persons).
• At the time of sale, at least 90% of the fair market value of the corporation’s assets must be used in an active Canadian business.

Note: These conditions are technical and should be reviewed by a tax professional well in advance of a sale.

Asset sale

In an asset sale, the buyer typically purchases the individual business assets — such as inventory, equipment, and goodwill — rather than shares of the corporation. Buyers often prefer this structure because they can “step-up” the tax cost of assets to their purchase price, resulting in increased depreciation and lower future taxable gains.

For the seller, an asset sale results in different forms of taxable income for the corporation:

• Recapture of Capital Cost Allowance (CCA) on depreciable property, taxed as business income.
• Capital gains on non-depreciable assets, such as land and goodwill.

After the corporation realizes taxable income from the sale, the distribution of proceeds to shareholders may occur through repayment of shareholder loans, return of capital, bonuses, taxable dividends, or capital dividends to utilize the non-taxable portion of capital gains. Each type of distribution has distinct tax consequences.

Next steps

Pre-Sale restructuring

Successful tax planning often begins years before a sale. Early planning allows you to ensure your business meets the QSBC criteria and to consider corporate reorganizations that may help maximize after-tax proceeds. We generally recommend reviewing your situation two to three years before a planned sale to allow time for restructuring and compliance with the QSBC ownership tests.

Analysis of alternatives

As discussed, the choice between a share sale and an asset sale hinges on the tax consequences for both buyer and seller, and this choice often influences the deal structure and purchase price. A thorough analysis includes planning the most tax-efficient way to distribute sale proceeds and integrate them into your broader succession or retirement plan.

How we can help

Selling a business involves complex tax implications and strategic decisions that can significantly impact your financial outcome. At DMCL, our advisors have the experience and expertise to guide you through every stage of the sale process, from pre-sale planning to post-sale tax strategies.

To learn more, or if you have questions about your specific situation, contact your DMCL advisor.