Asset vs. Share Sale Checker
Buying or selling an Ontario business? Answer a few questions to see which deal structure the factors point to, what the other side will push for, and what to raise with your lawyer and accountant.
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It updates live as you answer, with the reasons and what to raise with a lawyer or accountant.
Note: General information only, not legal or tax advice. The right structure depends on the full facts of your deal, and tax rules and thresholds change. Have a lawyer and an accountant confirm the points that apply to you.
Buying or selling a business?
Structure, price and tax are negotiated together. A lawyer can help you settle the structure before the letter of intent is signed.
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Asset vs. share sales in Ontario
The structure of a deal drives liability, tax, consents and price. Here is what to weigh before you settle it.
Asset vs. share, in a sentence each
In an asset sale the buyer picks the assets and liabilities it wants and the seller's company keeps the rest. In a share sale the buyer takes the company itself, with everything inside it, known or not.
Liabilities
A share purchase brings the company's whole history with it, including tax, claims and employee issues. An asset purchase lets a buyer leave most past liabilities behind, although some can still follow the business. Sellers should expect indemnities and a holdback to be negotiated either way.
Contracts and consents
In an asset deal, contracts such as the lease, key customer agreements and a franchise agreement generally have to be assigned, often with the other party's consent. In a share deal they stay with the company, but change-of-control clauses can still require consent.
Employees
In an asset deal the buyer chooses whom to offer employment; under Ontario's Employment Standards Act, service is generally treated as continuous for employees the buyer hires, and the seller deals with those not hired. In a share deal employment continues unchanged. Union bargaining rights generally continue either way: in a share deal the employer does not change, and in an asset deal the Labour Relations Act's successor-employer rules generally bind the buyer.
Seller tax: the capital gains exemption
The lifetime capital gains exemption, currently about $1.25 million per individual and indexed to inflation, can shelter a gain on qualified small business corporation shares, but only on a share sale by an individual. Tests include a 24-month holding period and active-business-asset tests, so surplus cash or investments may need purifying well before a sale.
Buyer tax: cost base and CCA
An asset purchase gives the buyer a fresh tax cost base, so it can claim capital cost allowance on equipment and goodwill. A share purchase inherits the company's existing tax values. The seller's result differs too, so an accountant should compare both structures.
HST and the section 167 election
Asset purchases are generally subject to HST (13% in Ontario) on taxable assets unless the buyer and seller jointly elect under section 167 of the Excise Tax Act. The election is generally available where the buyer is HST-registered and acquires all or substantially all of the property needed to carry on the business. Shares are exempt from HST.
Land transfer tax
An asset purchase that includes real property triggers Ontario land transfer tax, plus Toronto's municipal land transfer tax for property in Toronto. A share purchase generally does not. Buyers sometimes carve the property out of the deal for this reason.
Structure and price are negotiated together
Structure moves the price. A seller giving up the capital gains exemption, or a buyer giving up a cost-base step-up, will want to be paid for it. Ontario repealed its Bulk Sales Act in 2017, so protection for an asset buyer now comes from searches (such as under the PPSA) and lien releases rather than a statutory process.
What's the difference between an asset purchase and a share purchase?
In an asset purchase, the buyer acquires selected assets of the business (equipment, contracts, goodwill, inventory) and takes on only the liabilities it agrees to. In a share purchase, the buyer acquires the shares of the company that owns the business, so the company, its contracts, its employees and its history, including liabilities, all come along. The choice affects liability, tax, consents, employees and the price.
Why do buyers usually prefer an asset purchase?
Buyers often prefer an asset purchase because they can choose which assets and liabilities to take, leaving most past liabilities with the seller's company. An asset purchase also gives the buyer a fresh tax cost base to claim capital cost allowance on equipment and goodwill, whereas a share purchase inherits the company's existing tax values. The trade-offs are consents to assign contracts, licences that may be hard to transfer, HST and, if property is included, land transfer tax.
Why do sellers usually prefer a share sale?
Sellers often prefer a share sale because it is simpler and cleaner: the company, its contracts and its employees go with the buyer. For an individual selling qualified small business corporation shares, the lifetime capital gains exemption (currently about $1.25 million per individual, indexed to inflation) can shelter a large gain, but it only applies on a share sale and has holding-period and active-asset tests. Whether your shares qualify is a question for an accountant.
Can a sole proprietorship sell its shares?
No. A sole proprietorship is not a corporation, so there are no shares to sell. The sale of that business is an asset sale: the owner sells the equipment, goodwill, contracts and other assets directly. Some owners incorporate first, but that has tax and timing consequences that should be reviewed with an accountant and a lawyer before a sale.
Do I pay HST when buying a business in Ontario?
An asset purchase is generally subject to HST (13% in Ontario) on the taxable assets, unless the buyer and seller jointly elect under section 167 of the Excise Tax Act. The election is generally available where the buyer is HST-registered and acquires all or substantially all of the property needed to carry on the business. Shares are exempt from HST, so a share purchase does not raise this issue. Confirm the details with your lawyer or accountant.
Should the structure be decided before the letter of intent?
Yes. The letter of intent usually states whether the deal is an asset or a share purchase, and the price is negotiated on that basis. Changing the structure later reopens price and tax, and can mean new consents and a different set of risks. It is worth getting legal and accounting input on the structure before the letter of intent is signed.