Buying a Small Business in Canada: Asset Purchase or Share Purchase?
When a Canadian small business changes hands, one of the first decisions is structural: will the buyer purchase the business's assets, or the shares of the corporation that owns them? The choice affects taxes, which liabilities come along, whether contracts and permits transfer, and what happens to employees. Buyers and sellers often have opposite preferences, so understanding the trade-offs puts you in a better position at the negotiating table.
The basic difference
In an asset purchase, the buyer picks the specific assets it wants, such as equipment, inventory, customer lists, intellectual property, goodwill and selected contracts, and the seller's corporation stays behind with whatever was not sold, including its historical liabilities. In a share purchase, the buyer acquires the shares of the corporation itself. The company continues exactly as before, with all of its assets, contracts, employees, tax history and liabilities, known or unknown. Only the owner changes.
Why buyers often prefer an asset purchase
- Liability protection: the buyer generally takes on only the liabilities it expressly agrees to assume, leaving past lawsuits, tax reassessments and debts with the seller's company.
- Tax cost step-up: assets are acquired at their purchase price, so the buyer can claim capital cost allowance on depreciable property based on what it actually paid.
- Cherry-picking: the buyer can leave behind unwanted assets, contracts or locations.
Why sellers often prefer a share sale
Because the tax difference for the seller can be large, a buyer may be able to negotiate a lower price in exchange for agreeing to a share purchase. Both sides should get tax advice before settling on a structure.
- Lifetime capital gains exemption: individuals selling shares of a qualifying small business corporation may be able to shelter a significant amount of capital gains from tax. This exemption is not available when the corporation sells its assets.
- Single level of tax: in an asset sale, the corporation pays tax on the sale and the owner may pay tax again when the proceeds are paid out as dividends.
- Clean exit: once the shares are sold, the business's ongoing liabilities generally travel with the company to the buyer, subject to the representations and indemnities in the agreement.
Contracts, leases, permits and employees
In a share purchase, contracts usually stay in place because the contracting company has not changed, although some contracts contain change-of-control clauses that require consent. In an asset purchase, each important contract, lease, licence and permit must be assigned to the buyer, which often requires the consent of the landlord, supplier or regulator. Building those consents into the closing conditions is essential.
Employees are another key issue. Employment standards legislation in most provinces treats a buyer of a business as a successor employer, so employees who continue with the buyer generally keep their accumulated length of service. Buyers should review employment contracts, accrued vacation and any potential severance obligations during due diligence, whichever structure is used.
Sales tax and other closing details
In an asset purchase, GST/HST and provincial sales tax may apply to the transfer of taxable assets. Where the buyer acquires all or substantially all of the property needed to carry on the business and both parties are registered, they may be able to file a joint election so that GST/HST is not charged on the sale. Land transfer tax can apply if real estate is included. Share sales are generally not subject to GST/HST.
The parties also need to agree on how the purchase price is allocated among the assets, because the allocation affects both sides' taxes, and on adjustments for inventory, prepaid expenses and deposits at closing.
Due diligence: the step you cannot skip
Whatever the structure, the buyer should investigate the business before closing. A typical small-business due diligence checklist covers:
- Financial statements and tax returns for at least the last three years.
- Material contracts, leases and customer and supplier relationships.
- Employees, contractors, payroll and any outstanding claims.
- Ownership of equipment and intellectual property, and any liens registered against the assets.
- Licences, permits, environmental matters and compliance history.
- For a share purchase, the corporate minute book, share register and any past tax reassessments.
Putting it in writing
An asset purchase agreement or share purchase agreement records the price, what is being sold, the representations each side makes, conditions that must be met before closing, and indemnities if something turns out to be wrong. For a small transaction, a well-structured draft helps both sides agree on the commercial terms quickly. Because these deals involve tax planning, employees and potentially significant liabilities, the final agreement should be reviewed by a business lawyer and an accountant before anyone signs.
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Frequently Asked Questions
Is an asset purchase always safer for the buyer?
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It generally limits the liabilities the buyer takes on, but some obligations, such as successor employer rules for employees and certain environmental liabilities, can still follow the business. Due diligence remains essential.
Can a sole proprietorship be sold through a share purchase?
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No. A sole proprietorship has no shares, so its business is always sold through an asset purchase. Share purchases apply only to incorporated businesses.
What is a purchase price allocation?
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In an asset deal, the parties divide the total price among categories such as equipment, inventory and goodwill. The allocation affects the buyer's future tax deductions and the seller's tax on the sale, so it should be negotiated and recorded in the agreement.