How is a business valued differently in an asset sale versus a share sale in Canada?

The same business has two different effective values depending on whether it sells as an asset sale or a share sale, because each structure creates a different tax outcome for the buyer and seller. In an asset sale, the buyer receives a step-up in the tax basis of acquired assets to their purchase price, allowing future tax deductions through Capital Cost Allowance (CCA). In a share sale, the buyer inherits the seller's original tax basis and receives no immediate tax benefit, but the seller can access the Lifetime Capital Gains Exemption (LCGE) — $1,275,000 for 2026 — and pay tax at the lower capital gains rate on the entire proceeds.

The Same Business, Two Different Tax Bills

The LCGE applies only to share sales of Qualified Small Business Corporation (QSBC) shares, not to asset sales. In Canada, the capital gains inclusion rate for individuals is 50% as of 2024, meaning only half of the capital gain is added to taxable income. Sellers typically prefer share sales because they can access the LCGE and pay tax at the lower capital gains rate on the entire proceeds, rather than ordinary income tax on recaptured depreciation or inventory gains.

In an asset sale, recaptured depreciation on depreciable assets is taxed as ordinary income, not capital gains, which can increase the seller's effective tax rate significantly. The seller may accept less in an asset sale to avoid recapture tax, or demand more in a share sale if the LCGE fully shelters their gain.

How Asset Sales Change the Buyer's Tax Position

Buyers typically prefer asset sales because the step-up in tax basis creates future tax deductions, effectively reducing the after-tax cost of the acquisition. Goodwill in an asset sale is eligible for CCA at 5% declining balance under CCA Class 14.1, providing ongoing tax deductions to the buyer.

In a share sale, the buyer inherits the seller's original tax basis in the assets, receiving no immediate tax benefit from depreciation unless the business later sells assets or winds up. In a share sale, the buyer assumes all historical liabilities of the corporation, including contingent and undisclosed liabilities, which may reduce the effective value the buyer is willing to pay compared to an asset sale where liabilities are selectively assumed.

How Share Sales Protect the Seller's Tax Position

A share sale avoids land transfer tax entirely if real property is held within the corporation, because the property itself is not transferred — only the shares of the corporation owning it change hands. Real property in Ontario transferred as part of an asset sale is subject to Ontario Land Transfer Tax at marginal rates up to 2% for commercial property.

Deal structure negotiations frequently result in a price adjustment where the buyer offers 5–15% more in a share sale to offset the lost CCA benefit, depending on the asset composition and depreciation potential. A buyer may be willing to pay a higher gross purchase price in a share sale to compensate the seller for the lost tax benefit of no asset step-up, if the seller's tax savings from the LCGE are substantial enough to justify the higher price.

Purchase Price Allocation — Where the Negotiation Happens

In an asset sale, the purchase price must be allocated among asset classes — inventory, equipment, real property, goodwill — for tax reporting purposes using Canada Revenue Agency Form T2057, and this allocation directly affects each party's tax liability. Purchase price allocation disputes are common in asset sales because the buyer wants to allocate more to depreciable assets (equipment, goodwill) to maximize CCA, while the seller wants to allocate more to non-depreciable assets (land, shares if applicable) to minimize recapture.

Why the Same Business Can Have Two Different Effective Values

According to KPMG Enterprise Canadian M&A Tax Considerations Guide 2024, the same business may have two different effective values depending on structure: a seller may accept less in an asset sale to avoid recapture tax, or demand more in a share sale if the LCGE fully shelters their gain. The structure choice is not just a legal formality — it changes the economics of the transaction for both parties, which is why the negotiation over structure happens before the final price is settled.

This article is for informational purposes only and does not constitute financial, legal, or tax advice. Every business sale is different. Before making decisions about valuation, sale structure, or tax treatment, consult a qualified professional familiar with your specific situation.

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