Buying a Business: Asset Purchase vs Share Purchase

You’ve spotted a business you’d love to own, maybe a landscaping outfit with a loyal client list, and it sits inside a corporation. Haggling over the price comes second. First comes an odder question: what, legally, are you buying? You could buy the assets out of the corporation. Or you could buy the corporation itself, by purchasing its shares. On paper the number might be identical, $800,000 either way. After tax, the buyer and the seller can walk away with very different results. No wonder asset vs share purchase ends up being the real fight in so many small business deals.

Below I’ll unpack both routes, explain why buyer and seller nearly always pull in opposite directions, and show the usual compromises.

The Two Structures

Asset Purchase

In this version you’re shopping inside the seller’s corporation. You take the mowers and trailers, the stock in the shed, the customer list, whatever intellectual property there is, and the goodwill. Debts and obligations? Only the ones you sign up for. The money goes to the seller’s corporation, which sticks around afterward, often just long enough to be wound up.

Share Purchase

Now the buyer is purchasing shares from the shareholders. Nothing about the corporation itself changes. Same assets, same liabilities, same contracts and staff, same tax history. Just new names on the share register.

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Why Sellers Usually Prefer a Share Sale

The Lifetime Capital Gains Exemption

This is the big one. When an individual sells shares of a qualifying small business corporation, the lifetime capital gains exemption, currently $1.25 million per person, can shelter a large chunk of the gain. If a spouse and adult kids also hold qualifying shares, each of them may have an exemption of their own. Qualifying isn’t easy; there are tests on how the corporation’s assets are used and how long the shares were held. Pass them, though, and the savings can be enormous.

One Level of Tax

Sell shares and the gain lands straight in the shareholders’ hands, with generally only half of it included in income. Sell assets and it’s a two-step process: the corporation pays tax on its gain first, then the owners pay personal tax again when they pull the money out, usually as dividends. Integration is supposed to even that out. In practice the total tax, and the wait, often come out worse.

Avoiding Recapture

Picture a fleet of trucks that’s been written down for years. Sell those trucks in an asset deal and the corporation may face recaptured capital cost allowance, taxed as ordinary income. In a share sale, the seller doesn’t face recapture at all.

Why Buyers Usually Prefer an Asset Purchase

A Higher Tax Base

Buy assets, and whatever you pay becomes your tax cost. The equipment gets depreciated all over again from that new cost. Goodwill gets written off gradually too, through capital cost allowance in Class 14.1 at 5% a year, declining balance. Buy shares, and you’re stuck with the corporation’s old tax values, which are often pretty low.

Leaving Liabilities Behind

An asset buyer generally signs up only for the liabilities it agrees to. A share buyer gets the lot. Unpaid taxes, the chance of a reassessment for old years, lawsuits, environmental problems, employee claims, including the ones nobody knew about. Due diligence and indemnities help. They can’t make the risk disappear.

Picking and Choosing

And you get to be choosy. Want the newer machines but not the old ones, two of the three contracts, most of the crew? An asset deal allows that.

Other Tax Issues in Each Structure

GST/HST

Shares generally change hands without GST/HST. Assets are another story. If the buyer is taking all or substantially all of the property needed to run the business, and both sides meet the conditions, a joint election usually means no HST is charged on the transfer. Forget to file it and someone may be fronting a lot of cash.

Land Transfer Tax

Is there a building in the deal? In an asset purchase, Ontario land transfer tax applies, and in Toronto you pay the municipal land transfer tax on top. Buy the shares of a corporation that owns the building instead, and land transfer tax usually isn’t triggered the same way. On a commercial property, that gap can be a lot of money.

Purchase Price Allocation

An asset deal also means splitting the price across the assets. Buyers want as much as possible on things they can write off fast. Sellers want the split that keeps recapture and income inclusions down. Hash it out, keep it defensible, write it into the agreement. The CRA can push back on an allocation that doesn’t match fair value.

Losses and Tax Attributes

Buying shares can bring the corporation’s tax losses along. The catch: after a change of control, rules limit how you can use them. So before you pay a premium for those losses, get someone to tell you whether you’ll actually be able to use them.

Bridging the Gap

Sellers lean toward shares, buyers toward assets. So how do deals get done? Usually with some give on both sides:

• Price adjustment: the seller accepts a lower price for a share sale, or the buyer pays more for an asset sale, to share the tax difference.
• Hybrid structures: a bit of both, with certain assets sold outright and the remainder going over as shares.
• Stronger protections: a share buyer who’s swallowing the history will want detailed reps and warranties, indemnities, and a holdback sitting in trust.
• Earnouts: some of the price gets paid later, only if the business hits its numbers. Those carry their own tax treatment.

Getting the Right Advice Early

Talk structure before anyone signs a letter of intent. Those early documents set expectations, and they’re hard to walk back. You’ll normally want both a tax adviser and a lawyer on a business sale. If you’re in the GTA, working with a tax consultant Toronto business owners use for transactions lets you see the after-tax numbers for each option side by side, check whether the shares really qualify for the capital gains exemption, and plan any pre-sale reorganization while there’s still time.

Conclusion

Sellers usually want a share sale: the capital gains exemption, one level of tax, no recapture. Buyers usually want assets: a higher tax base, goodwill they can deduct, fewer inherited headaches. Then HST, land transfer tax, price allocation and tax attributes pile on. There’s no universal winner. It comes down to both sides’ numbers, so have someone run the after-tax math before you shake on anything.

Frequently Asked Questions

Is an asset sale or share sale better for the seller?

Most of the time, a share sale. Even more so if the shares qualify for the lifetime capital gains exemption.

Why do buyers prefer asset purchases?

Two reasons: a higher tax cost on depreciable assets and goodwill, and they dodge most of the seller’s liabilities.

Is HST charged when buying a business’s assets?

Sometimes. When substantially all the business assets are moving over, though, a joint election is often available.

Does buying shares mean I inherit the company’s tax problems?

Yes. The tax history stays with the corporation, so due diligence and indemnities really matter.