Selling a Business in Canada: What Tax Rules Should You Consider?

Selling your business is one of the biggest milestones of your entrepreneurial journey. It’s exciting, emotional, and deeply tied to your tax reality. How much you keep after the sale depends not only on the value of your company, but also on how you structure the transaction.

Are you deciding between a share sale and an asset sale? Hoping to take advantage of the Lifetime Capital Gains Exemption (LCGE)? Wondering whether you’ll have to pay tax when selling your business, or how to avoid unpleasant surprises with GST/HST/QST or depreciation recapture?

This guide explains everything you need to know about the tax implications of selling a business in Canada. You’ll discover how each type of sale impacts your tax bill, how to maximize your after-tax proceeds, and how to stay compliant with both the Canada Revenue Agency (CRA) and Revenu Québec.

Note: This content provides general information only and should not replace professional tax advice. Rules may differ depending on your province and your situation.

The Importance of Due Diligence

Before diving into the tax aspects of a business sale, it’s essential to understand due diligence, a key stage that determines how smoothly the transaction will unfold.

Due diligence is the process through which a potential buyer reviews the company’s financial, tax, and legal information to ensure accuracy and compliance before completing the purchase. Bound by confidentiality and non-disclosure agreements, the buyer examines assets, contracts, leases, and key documents such as financial statements and tax filings. The goal is to confirm that the business is in good standing and that there are no hidden liabilities.

For sellers, this means having well-organized records and up-to-date corporate books. Preparing for due diligence involves correcting administrative gaps, resolving legal issues, and renewing expiring contracts. A clean and transparent file not only builds trust but can also help maintain or increase the sale price.

Share Sale or Asset Sale: A Decisive Tax Choice

Your first major decision when selling a business is whether to sell the shares or the assets of your company. This choice fundamentally shapes your tax outcome, your eligibility for exemptions, and the financial exposure of both parties involved.

Think of it like selling a house:

• A share sale means selling the entire “house” with its history, furniture, and records intact.
• An asset sale is like selling individual rooms or furniture pieces. The buyer starts fresh with a new tax cost base.

In practice, sellers usually prefer share sales because of the potential for favourable tax treatment (especially with the LCGE), while buyers prefer asset purchases to get a clean start and new depreciation bases. Before finalizing, consult a corporate tax accountant or professional. They can run simulations, estimate the overall tax impact, and help you avoid costly pitfalls during negotiation.

Lifetime Capital Gains Exemption (LCGE): A Game-Changer for Small Business Owners

If you sell shares of a Canadian-controlled private corporation (CCPC), you could qualify for the Lifetime Capital Gains Exemption (LCGE): one of the most significant tax breaks available when selling a small business.

For 2025, the Lifetime Capital Gains Exemption (LCGE) limit is $1,250,000 for qualifying dispositions on or after June 25, 2024 (up from $1,016,836). This means that up to $1.25 million of your capital gain could be exempt from tax, an enormous benefit if you meet the required conditions.

Main conditions for qualified small business corporation (QSBC) shares:

• Held for at least 24 months before the sale.
• During those 24 months, more than 50% of the corporation’s assets were used in an active business in Canada (not passive investments).
• At the time of sale, at least 90% of the assets are used in the active business.

Good to know: the capital gains inclusion rate remains 50% through December 31, 2025. Finance Canada has announced a new inclusion rate taking effect January 1, 2026. Until then, 50% applies to dispositions before that date.

GST/HST and QST: the joint election that can remove sales tax (in some cases)

If your business sale involves assets rather than shares, the default rule is that GST/HST/QST applies on taxable property. However, there’s an important exception: a joint election between the buyer and seller can eliminate these taxes if the buyer acquires at least 90% of what’s needed to continue operating the business seamlessly.

• Federal: Excise Tax Act s.167(1) via Form GST44.
  Timing: CRA states GST44 must be filed no later than the date the purchaser must file their first return for the reporting period in which the tax would otherwise have become payable.
• Québec: Québec Sales Tax Act s.75 via Form FP-2044.
  Note: The election is joint and, if the purchaser is registered, the purchaser files the form with Revenu Québec according to the prescribed rules.

Even with an election, certain items remain taxable, such as real estate leases or stand-alone service agreements. Always document the election in the purchase agreement and specify who is responsible for filing and when.

How Is the Taxable Capital Gain Calculated?

In an asset sale, the total purchase price must be allocated among the business assets: inventory, equipment, buildings, and goodwill. This process, known as Purchase Price Allocation (PPA), determines how much of the sale is taxed as business income versus capital gains, a key driver of your sale-of-business tax implications.

Before anything else, establish the fair market value (FMV) of each item sold. FMV represents what a willing buyer and seller would agree on at arm’s length. The CRA and Revenu Québec rely on FMV to calculate recapture and capital gains, even if your negotiated price differs.

When the sale price of a depreciable asset exceeds its UCC (undepreciated capital cost), the excess becomes depreciation recapture, taxed as ordinary business income.

When it also exceeds the original purchase cost, the remaining amount is a capital gain: only 50% is taxable (until the end of 2025).

Goodwill, the intangible value of your reputation and client base, falls under Class 14.1. It’s part of your PPA and can significantly influence your final tax bill.

Concrete Example: Sell the Shares or the Assets?

Let’s see how these rules work in practice. The numbers below are for illustration purposes only. Your outcome may differ based on your corporate structure and province.

1. Share sale: Often the most advantageous for the seller

Assume an owner sells all the shares of their incorporated company for $3,000,000. The adjusted cost base (ACB), what they originally paid for the shares, is $200,000.

• Sale price: $3,000,000

• ACB: $200,000

• Gross capital gain: $3,000,000 − $200,000 = $2,800,000

• LCGE available: $1,250,000

• Taxable portion of the gain: (2,800,000 − 1,250,000) × 50% = $775,000

Thanks to the LCGE, a large part of the gain is exempt. The seller is taxed only on $775,000 rather than on the full $2.8M, a powerful lever when selling a small business. A clear demonstration of how strategic planning can drastically reduce the capital gains tax on selling a business.

2. Asset sale: More complex, often less favourable for the seller

Now, suppose the same entrepreneur sells the assets of their company for $4,000,000, including:

• Building: $2.5 M
• Equipment: $1 M
• Goodwill: $0.5 M
• Total = $4M

This transaction may be subject to GST/HST/QST, unless a joint election is made. A portion of the gain on equipment could be recapture taxed as business income (known as amortization recovery). The rest, including goodwill, is treated as a capital gain.

The result: multiple tax layers, limited access to LCGE, and more complexity. The buyer benefits from a stepped-up basis for future depreciation, a key selling business tax consideration.

Non-Compete Clauses: Pay Close Attention to Their Tax Treatment

Payments received for a non-compete agreement are generally treated as ordinary income, not capital gains. However, a joint election by written letter can sometimes reclassify part of this amount to reduce tax.

This election must be planned, documented, and signed before closing, a detail that’s often overlooked but can significantly affect the tax on selling a business.

Earn-outs (Deferred Price Payments)

Sometimes, part of the sale price is paid later, based on the business’s future performance, known as an earn-out. Under CRA administrative policy (IC 73-17R6), the cost-recovery method can be used, allowing you to recognize the gain gradually as amounts become certain rather than all at once at closing. This method aligns taxation with reality, especially useful when selling a business with performance-based payouts.

Just ensure that your agreement clearly defines the timeline and calculation method.

Family Transfers and Employee Ownership Trusts (EOTs)

In 2024, new rules under Bill C-59 made intergenerational business transfers easier, distinguishing genuine family successions from simple tax deferrals. These rules now cover both immediate and gradual transfers to eligible children or relatives.

A second measure introduced the Employee Ownership Trust (EOT). Between 2024 and 2026, a qualifying EOT can claim up to $10 million in capital gains exemptions, an innovative option for succession planning.

These measures apply federally; Québec may adapt its own criteria, so verify with your tax professional before proceeding.

Tax Checklist: Before, During and After the Sale

From a tax standpoint, the sale of a business involves several key steps. Here’s a practical checklist to help you stay organized and compliant throughout the process.

Selling a Business: Master the Tax Consequences Before You Sign

Selling a business isn’t just about transferring ownership, it’s about securing the value you’ve built over years of effort. Every choice you make, from sale structure to timing, can influence your after-tax proceeds. With careful planning, you can reduce your tax liability, benefit from the LCGE, and avoid complications with GST/HST/QST.

At T2inc.ca, we know that selling a small business, like many accounting and tax obligations, can feel complex. That’s why we provide clear articles and practical guides to help you understand, plan, and decide at the right time.

Ready for the next step? At T2inc.ca, we handle the full preparation of your T2 corporate tax return and your CO-17 return, so the sale of your business wraps up compliantly and stress-free. For strategic matters, we connect you with trusted partners in business succession and tax planning.

FAQ – Your Most Common Questions

💬 What are the requirements for the LCGE?

To qualify, you must sell QSBC-eligible shares: Held 24 months, 50% active assets during that time, and 90% active assets at the date of sale.

💬 How can I avoid GST/HST/QST on an asset sale?

By making a joint election, using Form GST44 federally and FP-2044 in Québec, when at least 90% of the assets needed to run the business are transferred.

💬 What is CCA recapture?

It’s the portion of the sale price that exceeds the UCC of depreciable property. This amount is taxed as business income, not as a capital gain.

💬 What is the cost-recovery method for earn-outs?

It’s a CRA-approved method allowing you to spread the gain over time as payments become known, a fairer approach for deferred sales.

💬 Are non-compete payments taxable?

Yes. They are taxed as ordinary income, unless a joint letter election (under ITA 56.4(7)) is properly filed.

💬 What is an Employee Ownership Trust (EOT)?

An EOT allows employees to gradually acquire the business. Between 2024 and 2026, a qualifying sale can benefit from a $10 million capital gains exemption.

💬 Should I consult a tax specialist before selling?

Absolutely. Each transaction is unique. A corporate tax specialist can help you structure the deal to minimize tax exposure and protect your financial outcome.