April 12, 2024


If you plan on buying or selling a privately owned business in Canada, it is highly recommended that you seek detailed and specific advice from professionals experienced in M&A (mergers & acquisitions) transactions.

There are two common forms used to structure mergers and acquisitions of private businesses in Canada: share purchase transactions and asset purchase transactions. In a share purchase transaction, the buyer purchases all (or the majority of) the issued and outstanding shares of the target corporation from its shareholders. An asset sale involves the negotiated purchase of the assets (or certain assets) of a company without acquiring the entity that owns them. An asset purchase transaction is typical when only a single property or division is of interest, or the new owner wishes to cap legacy liability exposure. A third and less commonly used form is the combination of two corporations through an amalgamation under corporate statute.

The choice of form is a threshold issue that is determined through negotiation between a buyer and a seller, which typically involves significant input from the parties’ tax advisers.

For tax reasons, buyers generally prefer asset transactions — unless the buyer specifically wants to acquire certain tax attributes of the target — while sellers generally prefer share transactions. The transaction parties need to consider that asset transactions are generally more complex than share transactions, since they require parties to obtain a larger number of consents and to transfer a larger number of diverse assets. In a share transaction, documentation is only required for the transfer of the shares and occasionally for the assignment of shareholder loans.

However, asset transactions may be the only practical structure when the parties want to transfer some (but not all) of the assets of a business. For example, a purchaser may only be interested in the inventory and equipment that the company owns and may make an offer to only purchase these desired assets. As well, the additional due diligence required in the context of a share transaction may impose longer pre-acquisition time frames.

A purchaser may also desire an asset transaction because it involves less liability risk. Purchasers are required by law to assume liability for environmental contamination and union employees, regardless of the transaction type. However, in an asset transaction, the purchaser is not required to assume liability for non-union employees unless they elect to offer them new contracts. Vendors may sometimes require the purchaser to offer similar or identical contracts to existing employees so that they can avoid wrongful dismissal claims. Additionally, the purchaser can use the purchased assets to create a new company, reducing the risk of unforeseen liabilities that may arise with the current company. Despite the reduced liability, purchasers should take the appropriate due diligence precautions by conducting searches and investigations, such as title, tax, zoning and fire searches, before entering into a transaction.

If the method chosen is a share transaction, there are some measures that a purchaser can take to protect themselves from liability. Additionally, a purchaser should consider requesting an indemnity agreement or a holdback of the purchase price for a period of time to ensure that they will not be responsible for unforeseen liabilities that arise within a specified time period.


Share Sale

Typically, this method is favoured by the vendor because of the personal income tax benefits. The proceeds of share sales (above the seller’s adjusted cost base) are taxed as capital gains with only 50 percent of the proceeds included as income. This is a significant financial benefit for the vendor. Also, if certain conditions are met, a $1,016,836 lifetime capital gains exemption (indexed to inflation) is available in 2024 to Canadian residents who sell shares of a qualified small business corporation. As a result, the vendor may be willing to negotiate a lower price in exchange for the purchaser agreeing to a share transaction.

A corporate seller may also be able to reduce its taxable gains by causing the target company to pay a non-taxable inter-company dividend from “safe income” (that portion of retained earnings attributable to earnings reported for income tax purposes) before the sale. The purchase price will be reduced accordingly.

There may be some tax benefits for the purchaser as well. In some cases, a purchaser may prefer a share transaction to take advantage of the target company’s non-capital tax-loss carry-forwards (i.e., business losses) that can be applied against future income. A share purchase also allows a purchaser to avoid paying sales and property transfer taxes on purchased assets.

Asset Sale

A target company will usually want the purchase price allocated to minimize the recapture of capital cost allowance previously deducted on depreciable property. A purchaser, on the other hand, will usually want to allocate as much of the purchase price as possible to depreciable property so that it can ‘step up’ the value of assets to their fair value, resulting in higher tax deductions for depreciation expenses in the future.

A purchaser will be required to pay property transfer tax on real property and buildings (including permanently affixed equipment) and, subject to GST and HST exemptions for the sale of substantially all of the assets of a business, sales tax on equipment and inventory (subject to any available exemptions).

Non-Canadian buyers

Typically, a non-Canadian buyer would establish a Canadian subsidiary to act as the acquisition vehicle. In addition to achieving business objectives, a Canadian subsidiary may provide several advantages to the buyer from a Canadian tax perspective. These advantages may include:

  • Facilitating the deduction of interest on financing for the acquisition against the income of the Canadian target.
  • Creating high paid-up capital in the shares of the Canadian subsidiary to facilitate the repatriation of funds back to the non-Canadian parent corporation free of Canadian withholding tax.
  • Positioning the buyer for a possible “bump” in the tax cost of the Canadian target’s non-depreciable capital property.

To take advantage of some of these benefits, it may be necessary to carry out a subsequent amalgamation of the acquisition vehicle and Canadian target. Care is required when designing the share structure of the Canadian subsidiary and arranging for it to be properly capitalized and financed for the acquisition.

Where assets, rather than shares, are being acquired, it is even more important to consider using a Canadian subsidiary. If a non-Canadian buyer purchases Canadian business assets directly, it will be liable for debts and liabilities that arise from the operations. It will also be liable for taxation on the income of those assets and any business carried out in Canada and will have to file Canadian income tax returns every year to report its income from Canadian operations.

By using a Canadian subsidiary to acquire the assets and to conduct the Canadian operations, the subsidiary becomes responsible for reporting the income and paying tax on the income, instead of the non-Canadian parent.


For many people, selling or buying a business is one of the biggest decisions they will ever make. Determining the appropriate structure is critical to a successful transaction. It is crucial to obtain appropriate advice from qualified advisers before committing to any structure, even on a generally non-binding basis pursuant to an LOI (letter of intent).

Whether you are looking to purchase or sell a company, there is a lot to consider when choosing between an asset or share transaction. As a purchaser, it is critical to consider potential liability and tax implications and to take steps to protect your investment such as conducting the appropriate due diligence searches. As a vendor, it is worthwhile to consider income tax implications and potential employment law liability. While typically purchasers favour an asset transaction and vendors favour a share transaction, unique circumstances and desired outcomes may result in a change of preferences. It is beneficial to consult with a business lawyer and explore all of your options before signing any documents.

Don't hesitate to get in touch with us for more information about asset and share transactions, or if you require assistance with a business transaction.



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