Most deals settle on price long before anyone asks how the transaction will be structured. That second question moves real money between buyer and seller, often more than the last round of price negotiation did. This guide sets out the differences between asset and share purchases. Then it works through the tax implications that decide which one you sign when you buy or sell a business.
Key Takeaways
- A share sale can shelter up to $1,275,000 of gain per shareholder through the exemption in 2026.
- Buying assets resets depreciation and steps up the tax cost of what changes hands.
- Liabilities follow the corporation, so anyone buying shares buys the history too.
- The price allocation across asset classes decides who pays what, and both parties file it.
- Two elections, section 22 and the GST/HST joint election, remove most of the friction from an asset transaction.
What an Asset Purchase and a Share Purchase Actually Transfer
A share purchase involves acquiring the shares themselves, so the corporation carries on unchanged. Contracts, leases, licences, employees, tax accounts and liabilities all come along, because nothing about the company itself has moved. The buyer assumes the assets and liabilities together. A share deal moves the company’s assets without touching a single title document.
An asset purchase works the other way. The buyer picks specific assets: equipment, inventory, goodwill, intellectual property, real estate and whichever contracts it wants assigned. Liabilities associated with the business stay with the vendor corporation unless the agreement says otherwise. An asset purchase agreement lists what moves and what stays, so nothing transfers by accident. Third-party consents create the usual friction, since leases and key customer contracts often need someone else’s approval to move.
That structural difference frames the entire negotiation. The terms of the agreement then decide who carries the past of the business and who only buys its future.
Why Sellers Prefer Share Sales
The lifetime capital gains exemption (LCGE) is the reason. An individual disposing of qualified small business corporation shares can shelter up to $1,275,000 of gain in 2026, and the limit is indexed each year. Spread ownership across a spouse and a family trust and a mid-sized transaction can move with very little tax.
The shares have to qualify for the LCGE first. At the time of sale, at least 90% of the corporation’s assets by fair market value must be used in an active business carried on primarily in Canada. Throughout the previous 24 months more than 50% must have been, and the shares must not have been owned by anyone unrelated during that window. Excess cash, portfolio investments and surplus real estate all break the test, which is why purification steps usually run months ahead of a closing.
A sale of shares is cleaner for the vendor in other ways too. Share sales are taxed once, in the shareholder’s hands, as a single capital gain. No recapture arises inside the company, and the corporation’s obligations walk out the door with it.
Why Buyers Prefer Asset Deals
Buyers prefer an asset structure for three reasons. The buyer sets the tax cost base of what it acquires at what it paid, so depreciable property starts a fresh capital cost allowance stream at full value instead of inheriting the vendor’s undepreciated balance. Goodwill lands in Class 14.1 and writes off at 5% a year. And the buyer takes on only the obligations it agrees to take on, so no assets or liabilities arrive unannounced.
Risk explains the rest. An asset purchase leaves behind payroll assessments, unremitted GST/HST, warranty claims and litigation nobody found. Buying shares means buying unknown liabilities alongside the good ones, which is why thorough due diligence, an indemnity and a holdback carry so much weight in a share transaction. A share purchase agreement also runs longer than its asset equivalent, because the representations have to cover everything the corporation has ever done.
Real estate is the one place the asset route costs more. Moving land triggers Ontario land transfer tax, or property transfer tax in British Columbia, where a share sale would not. Two more factors favour asset purchases in practice. The buyer can leave behind contracts it does not want, and it can walk away from any part of the operation that due diligence flags.
One point does favour the buyer on the share side. Acquiring a company and then amalgamating it with the acquiring corporation after closing simplifies the group, and in the right circumstances allows a bump to the tax cost of certain non-depreciable property under paragraph 88(1)(d).
How the Purchase Price Allocation Splits the Benefit
The sale price is one number in the agreement. What it costs each side depends on how that number is split. Every asset sale needs the consideration divided across classes, and the split is close to zero-sum. The vendor wants weight on goodwill and land, which produce capital gains. Meanwhile the buyer wants weight on inventory and short-lived depreciable property, which deduct fastest. Push depreciable property above its undepreciated balance and the vendor picks up recapture, taxed as ordinary income.
What the split is worth. On a $2,000,000 deal, shifting $400,000 from goodwill onto equipment already written down to $50,000 hands the vendor about $350,000 of recapture. At a 26.5% Ontario corporate rate that is roughly $92,750, against roughly $53,000 had the same amount stayed in goodwill and been taxed as a gain. The buyer collects faster deductions of a similar order over the following years. Nobody signs that line without pricing it.
Both sides report the allocation, and the Canada Revenue Agency can challenge one that does not reflect fair market value. Support each asset value with something better than a round number. Settle the split inside the purchase agreement rather than leaving it to the accountants in the spring.
| Issue | Buying shares | Buying assets |
|---|---|---|
| Vendor’s tax result | Capital gain, exemption may apply | Recapture, gains, then a second layer to extract cash |
| Buyer’s tax cost | Carried over from the corporation | Reset to the price paid |
| Hidden exposure | Transfers with the company | Generally stays behind |
| Contracts and licences | Continue untouched | Need assignment and consents |
| Employees | Employment continues | Terminated and re-hired, with service recognized |
| Land transfer tax | Not triggered | Applies where real estate moves |
Tax Elections That Matter in an Asset Sale
Section 22. Where a vendor sells all or substantially all of the property used in a business and the buyer proposes to continue it, the two can jointly elect under section 22 of the Income Tax Act on the accounts receivable. The vendor deducts the shortfall between face value and the amount paid as an ordinary loss, the buyer includes the same amount, and the buyer can then write off the bad debts as they surface. Without the election the vendor’s loss is a capital loss, worth half as much.
The GST/HST election. Section 167 of the Excise Tax Act lets a vendor and a registrant buyer jointly elect so that no tax applies to the transfer of a business or part of a business, where the buyer acquires all or substantially all of the property needed to carry it on. The purchase of a business as a going concern normally meets that test. Filed on Form GST44, the election avoids a large payment that would only be recovered months later through input tax credits. Real property inside the deal follows separate self-assessment rules, so confirm the treatment before closing. CRA’s guide on the sale of a business sets out the conditions.
Restrictive covenants. A non-competition payment to the vendor is fully taxable as ordinary income under section 56.4 unless an exception applies, and elections exist to treat the amount as proceeds of goodwill or of shares instead. Allocate a covenant carelessly and the vendor converts a sheltered gain into fully taxable income at the stroke of a pen.
Choosing an Asset or Share Structure
The differences between an asset purchase and a share purchase are not only about tax. Each structure carries tax advantages for one side and a matching cost for the other. The party opting for an asset purchase is usually the one with more to lose from the past. Whether you sign an asset purchase or a share purchase, the arithmetic should come before the argument.
Choosing between an asset structure and a share structure is rarely a close call once the numbers are on paper. Two routes can produce the same headline price and very different after-tax results. Four rules cover most situations when you weigh an asset purchase against a share purchase:
- Take shares when the vendor’s exemption is live and the price reflects the saving, or when licences and contracts would be painful to assign.
- Take assets when the target carries litigation, tax exposure, or records nobody can fully verify.
- Take assets when depreciable property sits at a low undepreciated balance, because the step-up is worth real money.
- Consider a hybrid, where part of the value leaves through a share redemption and the rest through a sale of assets, when neither side will move.
In our corporate advisory work, the standoff nearly always resolves in the price rather than the structure. A vendor sheltering $1,275,000 of gain saves roughly $341,000 of Ontario tax at the top personal rate. A buyer who cannot refuse the share structure usually recovers part of that through the price, the holdback or a longer indemnity period. Putting that number on the table early turns an argument about structure into an arithmetic problem both advisers can solve.
Frequently Asked Questions
What is the difference between an asset purchase and a share purchase?
One buys things, the other buys the company that owns them. Buying shares carries every existing obligation forward, while buying assets leaves them with the vendor unless the contract assumes them. The tax outcomes for each side follow from that split.
Is a share sale better than an asset sale?
Better for the vendor, usually. Shares produce a single capital gain that may qualify for the exemption, while selling assets can trigger recapture inside the corporation and a second layer of tax when the sale proceeds are paid out to the owner.
Do buyers want assets or shares?
Assets, in most cases. The buyer gets a fresh depreciation base, avoids inherited exposure and can leave problem contracts behind. Buyers prefer a share purchase only when the vendor prices the difference or when licences cannot practically be transferred.
How do liabilities transfer in an asset purchase versus a share purchase?
In a share purchase they do not move at all, because they stay inside the corporation the buyer now owns. In an asset purchase the buyer takes on only what the agreement lists, and the rest stays with the vendor. Known obligations get assumed and priced, while unknown ones are managed through representations, warranties and a holdback.
In an asset sale vs a share sale, what happens to employees?
In a share sale nothing changes, because employment continues with the same corporation. In an asset sale the vendor terminates the employees and the buyer offers new employment, and prior service usually counts for statutory notice. Budget for the vacation pay and termination costs that land on the vendor at closing.
What are the tax implications for the buyer and the seller?
The buyer wants a high tax cost to depreciate, and the seller wants a capital gain the exemption can shelter. Those goals pull in opposite directions, which is why the allocation is negotiated line by line. Model both structures after tax before anyone argues about the headline number.
What does an asset purchase mean?
It means the buyer acquires named property of a business, such as equipment, inventory, goodwill and assigned contracts, rather than the shares of the company running it. The vendor corporation survives the closing and keeps whatever was not sold.
Can a deal be part asset and part share?
Yes. Hybrid transactions redeem or sell some shares while the corporation sells selected property, letting the vendor use the exemption while the buyer steps up part of the tax cost. They are more complex and need modelling before anyone signs.
The Bottom Line
When you are buying a business, structure is not a formality bolted on at the end. It is a second negotiation over the same money, and the party who models it first tends to win it.
- Sellers gain most from shares, and only if the qualification tests are already met.
- Buyers gain most from assets, through tax cost and risk avoided.
- The allocation of consideration is where the remaining value is divided.
- Section 22 and the GST/HST election should be agreed before closing, not after.
Buying or selling a business is a once-a-decade decision for most owners, and the trade-offs rarely show up in the headline price. Making an informed decision means running both structures after tax, with your real balances. Whether your shares qualify, what your equipment balances look like, and how much of the gap can be priced are all specific to your file. Our corporate tax advisory team models both structures side by side before a letter of intent gets signed. Get in touch while the terms are still open.
