LCGE, GST44, and QSBCS: Canadian Share Sales vs. Asset Sales

A few exceptions matter here. Only an incorporated business can be sold as a share sale; sole proprietorships and partnerships only offer the asset route. Before either transaction, both sides typically assemble:

• Financial statements and tax returns for the past three to five years
• A complete asset register with cost and current value
• Copies of material contracts, leases, and licences
• Corporate minute books and shareholder records

Asset sale: buyer perspective: advantages, allocation, and due diligence

Buyers gravitate toward asset deals because they can pick what comes with them. A buyer can leave behind a lawsuit, an unfavourable lease, or an underperforming division while keeping the equipment, client list, and goodwill that actually drive value. That selectivity is the single biggest reason asset purchases dominate smaller business transactions.

The purchase price allocation drives much of the buyer’s tax advantage. When a reasonable price is assigned to each asset class in the purchase agreement, the Canada Revenue Agency generally lets the buyer use those figures for capital cost allowance claims. Equipment, vehicles, and leasehold improvements each fall into their own CCA class, so a higher allocated value there means larger annual deductions going forward. Goodwill and customer lists go into CCA Class 14.1, which is deducted at 5% a year on a declining balance. So money allocated to goodwill is written off much more slowly than equipment.

If the buyer is taking over accounts receivable, buyer and seller can jointly elect under section 22 of the Income Tax Act (Form T2022). That lets the buyer deduct receivables that later prove uncollectible, and keeps losses on them on income account for the seller.

Before signing, a buyer’s due diligence usually covers:

• Material contracts and whether they require third-party consent to assign
• Employee entitlements, union agreements, and benefit plan obligations
• Environmental liabilities tied to the property or operations
• Outstanding tax assessments or audit exposure on the entity being sold from

Pro Tip: Negotiate the allocation schedule as part of the letter of intent, not after closing. It is far harder to agree on numbers once each side already knows how the tax bill lands.

Buyers also lean on representations and warranties, indemnities for pre-closing liabilities, and working capital adjustments at closing to fine-tune the final price once the books are confirmed.

Law: Income Tax Act s.68 (allocation of consideration); Income Tax Act s.20(1)(a) (capital cost allowance).

Asset sale: seller perspective: corporate tax and what happens after closing

For a seller, an asset sale often means paying tax twice. The corporation pays tax on any gain from selling its assets, and then a second layer of tax can apply when the remaining proceeds are distributed to shareholders as a dividend. That combination frequently produces a higher total tax bill than a comparable share sale would.

The “double tax” is usually smaller than it looks, because Canada’s integration rules soften it. The tax-free half of any capital gain goes into the corporation’s capital dividend account, and it can be paid to shareholders tax-free. Part of the corporate tax on investment income can be refunded when the corporation pays taxable dividends. Model the after-tax cash in your hands under both structures before deciding.

Capital cost allowance recapture is part of what drives this. When assets sell for more than their undepreciated capital cost, the difference is added back to income as recapture. Recapture is fully taxable, not half-taxed like a capital gain. If the assets were used in an active business, it’s generally taxed as active business income. Selling above the original cost creates recapture up to the original cost and a capital gain on the amount above it. A piece of equipment with a low remaining tax value that sells for a strong price can trigger a meaningful recapture bill. Conversely, assets sold below their tax value may produce a terminal loss that offsets other income.

Because of this exposure, sellers in an asset deal tend to negotiate hard on:

• The allocation of proceeds across asset classes, since this directly affects recapture
• Holdback or escrow terms tied to warranty claims
• Timing of closing relative to the corporation’s fiscal year end
• Whether liabilities retained by the corporation are fully quantified before signing

Sellers preparing for this kind of deal benefit from having an up-to-date asset register and CCA schedule ready well before negotiations start, since those documents shape the entire tax conversation.

Law: Income Tax Act s.13(1) (recaptured depreciation); Income Tax Act s.40(1) (capital gains).

Share sale: seller perspective: capital gains, LCGE, and the QSBCS tests

A share sale ordinarily produces a capital gain rather than business income, and only 50% of that gain is included in taxable income. For many incorporated business owners, the real prize is access to the Lifetime Capital Gains Exemption, which can shelter a substantial portion of that gain from tax entirely.

The lifetime capital gains exemption is indexed to inflation each year; check the current limit on CRA’s capital gains deduction page (line 25400) for the year of sale. The exemption isn’t automatic. To be qualified small business corporation shares, the shares must pass three tests:

• At the time of sale: all or substantially all (generally 90% or more) of the corporation’s assets, by fair market value, must be used mainly in an active business carried on primarily in Canada, or be shares or debt of other qualifying small business corporations.
• For the 24 months before the sale: more than 50% of the assets must have met that same test.
• For the 24 months before the sale: no one other than you or a related person can have owned the shares.

The 90% test at the date of sale is where most deals fail. Excess cash or investments usually need to be moved out (“purified”) before closing.

A handful of common situations put QSBCS status at risk:

• Excess cash, investments, or redundant real estate sitting inside the corporation
• A recent reorganization that resets the 24-month ownership clock
• Shares held through a holding company. The LCGE can only be claimed by an individual, so if your operating company’s shares are owned by a holdco, a buyer must buy the holdco’s shares, or you need a reorganization well in advance.
• Prior asset sales inside the corporation that changed what it holds

If any of these apply, a checklist for preserving LCGE eligibility before a sale is worth working through months in advance, not during closing week.

Despite this exemption, some sellers still prefer an asset sale: a buyer unwilling to take on historical liabilities, or a seller whose shares simply do not qualify, can make the asset route the only realistic path even though it costs more in tax.

Law: Income Tax Act s.110.6 (capital gains deduction); Income Tax Act s.84.1 (non-arm’s length sale of shares).

Share sale: buyer perspective: inherited liabilities and the protections to negotiate

Buying shares means buying the whole corporate history, not just the parts you can see on a balance sheet. Past tax filings, ongoing litigation, environmental exposure, and even unresolved payroll remittance issues all travel with the entity. A clean-looking business can still carry a reassessment risk from a return filed years before the buyer ever got involved.

Because that exposure is real, buyers typically insist on a defined set of protections:

1. Detailed representations and warranties covering tax filings, employee matters, and material contracts
2. Indemnities that survive closing for a defined period, often longer for tax matters than for general commercial claims
3. An escrow holdback sized to cover likely reassessment or warranty claims
4. Tax liability insurance where the exposure is quantifiable but the parties want certainty rather than a long indemnity period

Pro Tip: Ask for copies of the corporation’s notices of assessment for the past several years before finalizing price. Gaps or amended returns in that history are a signal to dig deeper, not a reason to walk away automatically.

Due diligence on a share purchase tends to focus heavily on prior tax audits, outstanding employee entitlements such as vacation pay and severance obligations, and the terms of material contracts that may contain change-of-control clauses. Despite the added risk, buyers sometimes still prefer shares when the corporation holds a licence, permit, or long-term contract that cannot easily be assigned to a new entity, or when the seller insists on a share deal and the price reflects that trade-off.

Also note the tax-value trade-off: in a share sale the buyer inherits the corporation’s existing tax values; there is no step-up on a share purchase. A partial “bump” of non-depreciable capital property (such as land) is available only if the buying corporation later amalgamates with or winds up the target under paragraph 88(1)(d) of the Income Tax Act. Depreciable assets can’t be bumped.

Purchase-price allocation and the forms that make it official

Allocation is not just a negotiating point. It determines which CCA class each asset lands in, how much recapture a seller faces, and what deductions a buyer can claim going forward. Both parties generally want the figures in the purchase agreement to be reasonable and consistent, since the Canada Revenue Agency can otherwise substitute its own fair market value estimates.

Form T2057 is the section 85 rollover election. It’s used when you transfer property to a corporation in exchange for shares, for example in a pre-sale reorganization or when moving a sole proprietorship into a corporation. It doesn’t apply to an ordinary arm’s-length sale of assets to a buyer.

On the GST/HST side, CRA’s guidance on selling a business explains the joint election available under Form GST44. Where a buyer acquires all or substantially all of the property needed to carry on the business (CRA generally reads “substantially all” as 90% or more), the parties can jointly elect under section 167 of the Excise Tax Act to have no GST/HST payable on the sale. Generally both parties must be GST/HST registrants, and the buyer files Form GST44 by the due date of its return for the first period in which tax would otherwise have been payable. See CRA’s GST44 form page. This election typically applies only to asset sales, since share transfers already fall outside GST/HST.

A short checklist for who files what:

• Buyer and seller jointly sign and the buyer files Form GST44 by the buyer’s filing deadline for the period involved
• Both parties retain allocation schedules supporting the agreed purchase price
• The seller’s advisor confirms whether T2057 applies to any portion of the transfer

Law: Income Tax Act s.68 (allocation of consideration); Income Tax Act s.22(1) (sale of accounts receivable); Excise Tax Act s.167(1) (supply of business assets).

Hybrid transactions and why the CRA watches them closely

Some deals combine elements of both structures. A hybrid transaction might see the buyer acquire certain assets directly while also purchasing shares of a related entity, often to let the seller access the LCGE on part of the proceeds while giving the buyer a stepped-up cost base on another part.

The appeal is obvious: each side gets some of what it wants. The risk is that the Canada Revenue Agency and the courts scrutinize these structures closely, particularly where anti-avoidance rules could change how the proceeds are taxed. Section 84.1 can turn an expected capital gain into a taxable dividend when you sell shares to a corporation you don’t deal with at arm’s length, including a family member’s company that doesn’t meet the intergenerational transfer rules. Subsection 55(2) works the other way: a tax-free dividend paid to a corporation, such as a pre-sale dividend to a holding company, can be treated as a capital gain to the extent it exceeds the share’s safe income. Subsection 84(2) applies mainly when a corporation winds up or distributes its property. A poorly structured hybrid can leave a seller facing dividend treatment on an amount they expected to be a capital gain.

Common alternatives when the hybrid risk feels too high:

• A straightforward share sale with price adjusted to reflect the buyer’s lost CCA step-up
• A straightforward asset sale with the seller accepting the corporate-level tax hit
• A pre-closing reorganization completed well in advance, with its own specialist review, rather than baked into the closing mechanics

Any hybrid structure deserves dedicated legal and tax advice before the agreement is drafted, not after.

Law: Income Tax Act s.55(2) (deemed proceeds or gain); Income Tax Act s.84.1 (non-arm’s length sale of shares).

How to choose: a decision checklist for your advisor meeting

Walking into a meeting with a clear sense of your own facts saves time and sharpens the advice you get back. Start with these questions:

1. Have you (or a related person) owned the shares for the past 24 months, with more than 50% of the corporation’s assets used in an active business carried on mainly in Canada throughout that period, and will 90% or more qualify at the date of sale?
2. Does the corporation hold a licence, permit, or contract that would be difficult or impossible to assign?
3. Is the seller retiring and prioritizing after-tax proceeds, or prioritizing a fast, clean exit regardless of tax cost?
4. Does the buyer need financing that depends on claiming CCA on a stepped-up asset base?
5. Have there been recent corporate reorganizations that could affect QSBCS status?
6. Is the buyer an employee ownership trust? A qualifying sale to an EOT can exempt up to $10 million of capital gains, shared among the sellers, and the exemption is now permanent.
7. Is the buyer a family member’s corporation? Special intergenerational transfer rules under section 84.1 may apply.