Tax Implications of Selling a Business in Ontario, Canada

At the time of selling their company, business owners are more interested in knowing how much money they will keep after the sale than what price they will get. Tax can have a huge impact on the proceeds from the sale. Since tax regulations vary among US states and Canadian provinces, we will focus on Ontario in this post.

This post provides some general information about the tax repercussions of selling a business but is not intended to replace professional advice from Lawyers, Accountants and Tax Experts. Business sellers should to seek competent professional advice concerning tax and liability matters when contemplating the sale of their companies.

From a tax perspective, a business owner shall first make a decision about the structure of the sale: Share sale vs. Asset sale:

Share Sale: The company is sold as a whole. The new shareholder becomes the Buyer who takes over the company including both its assets and liabilities. Therefore, all company debts are also transferred to the buyer. Other company stakeholders such as employees, customers, suppliers etc. are not affected since the company remains the same. There is only a change in share ownership.

  • Tax implications: As a seller, you pay very little tax on the first $750,000 (as of today). This is a one lifetime tax exemption in Ontario, Canada. if other family members are also shareholders, they might also benefit from this exemption. Caution: Qualifications for this exemption are stringent.¬† Sellers should verify with their tax expert that they qualify.As a buyer, this option is not favorable from a tax perspective because the goodwill portion of the purchase price cannot be depreciated. Most buyers are very reluctant to purchase shares especially when the business is relatively small.
  • Risk implications: The seller of shares sells also liabilities including possible employee liabilities and the buyer inherits these liabilities. From a buyer’s perspective, purchasing the shares could be very risky especially if the business has undisclosed liabilities. While most share purchase agreements will have a special clause stating that the seller should still remain liable for any undisclosed liability or any liability that is the result of an event occurring prior to the sale, it will be still the responsibility of the buyer to face the liability with the option to sue the seller if the seller does not pay for such a liability.

Asset Sale: in this structure, the company only sells its assets such as inventory, equipment, leaseholds, goodwill, name, customer contracts and relationships etc. The buyer creates their own legal entity and does not purchase the existing legal entity. The seller dissolves the existing entity after the sale.

  • Tax implications: The seller in this case is not the owner directly but the corporation belonging to the owner is. The corporation will sell its assets and will pay a combination of capital gain and income tax. In Ontario, 50% of capital gains (if these gains qualify as capital gains) are not taxable. In this case, the sale structure will matter for seller. The part of the purchase price allocated to equipment, leaseholds and other tangible assets should not exceed their book value on the balance sheet at the time of closing to avoid any recapture, which would increase the portion of taxable income vs. capital gains. From a Buyer’s perspective, this is the most advantageous structure since the goodwill portion of the purchase price can be amortized over a period of time, which should reduce future taxes for the buyer.
  • Risk implications: Since the buyer is only buying the assets, all the liabilities remain with the seller. It’s the seller’s responsibility to pay for all debts including any new liabilities related to the period before the sale that only appear after the sale. For example, the Buyer doesn’t have to worry about a tax audit that happens after the sale and that questions the seller’s accounting¬† practices prior to the sale (with some exceptions).

While most business sellers prefer to sell shares because of the huge tax advantage they receive from a share sale, most business buyers prefer to buy assets. In practical terms, most transactions for small or very small businesses happen as asset sale. As a business broker, I can still see some small transactions structured as share sale and more specifically in these two circumstances 1.When the seller accepts to finance a part of the translation (as a Vendor Take Back Loan), such a loan can guaranty any undisclosed liability that shall be paid for by the seller and 2. When the business has received a large number of offers and one of the buyers is willing to take the risk because they want the business and they trust the sellers.

Comments 13

  1. Peter wrote:

    Hi,
    This is a great article.
    I am actually thinking about selling my convenience store in Toronto through an asset sale, valued at around 200k. Would you be able to tell me how much tax I would be expecting to pay?

    Thanks,

    Posted 18 Mar 2011 at 10:08 pm
  2. Omar Kettani wrote:

    Thanks Peter for your comment. I suggest you contact an accountant with experience in the sale of small businesses. Calculating the taxes you would have to pay if you sell your business can get very complicated and depends on your personal tax situation.

    I wish you good luck.

    Posted 19 Mar 2011 at 2:09 pm
  3. Jennifer wrote:

    I am looking to sell my shares in my business for around 450 plus inventory around 150 around how much tax would I pay on it.

    Posted 17 May 2011 at 8:34 pm
  4. Omar Kettani wrote:

    HI Jennifer,

    Thanks for your comment on our blog. Tax matters are very complex and are specific to unique individual situations. I strongly suggest you talk to an accountant familiar with the the tax aspect of selling small businesses. If your business is located in Ontario, and if it qualifies for the one lifetime $750,000 tax exemption, and if you haven’t already used this exemption in previous transactions, then you would probably pay very little tax on the sale of your shares (on the first $750,000). I know some tax experts who specialize in the transfer of businesses. They are definitely not cheap but the their are worth their cost.

    Good luck.

    Posted 29 May 2011 at 10:07 am
  5. Sam wrote:

    Hi Omar,
    My partner and I are selling our half of the business to a new partner. How much tax can we expect to pay on 1.2 million? can you recommend a tax expert?
    thanks

    Posted 09 Jul 2011 at 12:33 pm
  6. Omar Kettani wrote:

    Hi Sam,

    As I said in my comment below, if you sell the shares and if your business qualifies for the one lifetime share sale tax exemption then each of the selling partners will pay very little tax on the first $750,000 they received, if they haven’t used this exemption before. You can email me to omar (at) torontobusinessbroker (dot com) and I will email you the contact info of a tax specialist that I worked with in the past.

    Posted 11 Jul 2011 at 8:48 pm
  7. Rob wrote:

    Can you let me know if Canadian citizens who are non-residents of Canada at the time of the share sale, are also entitled to the $750K share sale exception ?

    Posted 25 Jul 2011 at 1:17 pm
  8. David wrote:

    I am an incorprated small business. I would like to bring a partner for 5o% of business. How would you structure this sale of the half of business.( Or does it have to be a sale? )
    What are tax implication of the sale of shares ( or does it have to be sale of shares? )

    Thank you.

    Posted 25 Jul 2011 at 3:24 pm
  9. Omar Kettani wrote:

    Hi David,

    Since I am not an accountant, I would strongly advise that you consult with an accountant specialized in taxation for business transfer. My first thoughts are that you don’t have to sell 100% of shares in order to take advantage of the one lifetime tax exemption. It has to be a share sale however. You could explore a situation where you sell the partner 50% of shares and then increase the capital for future growth. A tax expert will certainly help you structure the partnership to minimize the tax impact.

    Posted 25 Jul 2011 at 3:31 pm
  10. Omar Kettani wrote:

    Rob, the one-lifetime tax exemption has a long list of conditions. Not all businesses qualify. I would suggest talking to a lawyer to see if you would qualify. I have serious doubts that a non Canadian resident would qualify.

    Posted 25 Jul 2011 at 3:35 pm
  11. Don Flammond wrote:

    I recently sold my shares in a small incorporated business, the buyers accountant sent me a T5 slip showing the sale as dividends, will this not allow me to claim capitol gains on the sale. If so can i do anything about this.
    Thank You
    Don Flammond

    Posted 26 Feb 2012 at 1:40 am
  12. Nichola wrote:

    I am a non-resident of Canada, when I was living there temporarily due to my husband’s job, I set up with a friend a small business (although we didn’t know if it would take off, more of an experiment really). It did take off and I moved back to the UK where I continued working on the business via email and phone,
    This has now been sold and we are splitting the money 50/50. The sale was $28K. Deduct from this $2.5k of legal expenses. There are no outstanding detbs. What are the tax implications? Do we pay a one off tax payment to Canadian Govt as in Capital Gains, or just our own income tax liabilities. My share will be transferred to my UK account and of course will be subject to conversion rates.

    Posted 27 Dec 2013 at 5:29 am
  13. Barry wrote:

    Hi,
    I am considering buying an existing businesses assets & intellectual propery/goodwill in Ontario in the service industry and was wondering if and what percentage of tax would be on the sale of this type of business for me the purchaser?
    Thank you,

    Posted 06 May 2014 at 1:31 pm

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