Asset Purchase vs. Share Purchase

In an asset purchase, the buyer acquires specific assets of the business — equipment, inventory, customer lists, intellectual property, permits, and sometimes the commercial lease — but does not acquire the corporation itself. The seller retains the corporate entity. In a share purchase, the buyer acquires all (or a controlling number) of the shares of the corporation that carries on the business, and the corporation continues operating after the transaction with the same contracts, employees, licences, and liabilities it had before. The distinction matters enormously because shares carry with them all of the liabilities and obligations of the corporation, disclosed and undisclosed, whereas an asset purchase allows the buyer to cherry-pick assets and leave behind unwanted liabilities.

From the seller's tax perspective, a share sale is usually preferable. If the shares are qualifying small business corporation shares, the seller may be eligible for the Lifetime Capital Gains Exemption (LCGE) — indexed to inflation annually under the Income Tax Act. In 2024, the LCGE shelter was $1,016,602 per individual. This exemption can shelter a significant portion of the capital gain on the sale from income tax entirely. In an asset sale, the selling corporation pays corporate income tax on any gains at the corporate level; extracting those after-tax proceeds as dividends or capital gains to the shareholder creates a second layer of tax. The tax inefficiency of an asset sale for the seller is why sellers almost always prefer a share purchase structure when they qualify for the LCGE.

Buyers generally prefer asset purchases for tax reasons. In an asset purchase, the buyer can allocate the purchase price among the acquired assets — equipment, goodwill, non-competition covenants, customer relationships — and use various CCA classes to claim capital cost allowance deductions going forward, using the full purchase price as the tax cost. In a share purchase, the buyer steps into the shoes of the selling corporation, inheriting its historical tax cost base for all assets (potentially very low) and all of its historical tax liabilities. The difference in CCA deductions available to the buyer can represent hundreds of thousands of dollars in present value over a 5–10 year horizon, making asset deals structurally more attractive to buyers.

Liability exposure is the most significant non-tax consideration in the asset-versus-share decision. In a share purchase, the buyer acquires the entire corporation — including all undisclosed liabilities. These might include pending litigation not yet served, environmental contamination, CRA tax reassessments for prior years, Employee Health Tax arrears, WSIB premium obligations, or employment claims arising from historical conduct. The buyer's only protection is the representations and warranties in the purchase agreement and the indemnification provisions. In an asset purchase, the buyer can negotiate to leave behind specific known and unknown liabilities — though certain statutory liabilities (including employment obligations under the Employment Standards Act, 2000) may follow the assets in a business sale regardless of how the transaction is structured.

Because sellers want a share sale and buyers want an asset purchase, the tension between these preferences is often resolved through price adjustment. A seller may accept a lower price in exchange for a share purchase structure (given the LCGE availability). The gap may also be bridged through a section 85 rollover under the Income Tax Act, allowing certain assets to be transferred to the buyer's corporation on a tax-deferred basis. In transactions where the LCGE is unavailable — for example, the corporation does not qualify as a small business corporation — the tax rationale for a share purchase is weaker, and asset purchases are more common.