Tax implications of selling your business in Ontario

Start with what is being sold

A buyer may offer to purchase your shares or the business’s assets, and the two routes lead to different tax results. In a share sale, you as the shareholder sell your ownership of the corporation. In an asset sale, the corporation sells its equipment, inventory, goodwill and other property, and the corporation reports the result. A sole proprietor has no shares, so a sale is always a sale of assets.

Buyers often prefer assets and sellers often prefer shares, so the structure is negotiated. Raise it with your accountant before you sign anything, not after, because a signed agreement that names the structure and divides the price is hard to change.

How a share sale is taxed

When you sell shares you own personally, you generally have a capital gain: the proceeds, less the adjusted cost base of the shares and the costs of selling. The CRA’s current guidance puts the inclusion rate at one-half, and the increase to two-thirds that had been proposed was cancelled. The taxable half is added to your other income for the year and taxed at your marginal rates.

The adjusted cost base is often small for a founder who paid little for the shares, which is why the gain can be large. If you transferred a business into the corporation earlier, your cost base may depend on the agreed amount in that election, so find the paperwork. Keep legal and broker fees, because they reduce the gain.

A gain is reported for the calendar year of the sale, even when a corporation has a different fiscal year-end. You must report the sale on your return even if no tax is payable.

The lifetime capital gains exemption

Some gains on qualified small business corporation shares may be sheltered by the lifetime capital gains exemption. For 2025 the CRA reports a limit of $1,250,000, described as under proposed changes, which means a maximum capital gains deduction of $625,000 on line 25400. The limit is indexed to inflation, so confirm the figure for the year of your sale. You can claim any amount up to your maximum, and past claims reduce what remains.

The shares must pass several tests. At the time of sale the company must be a small business corporation. You, your spouse or common-law partner, or a partnership you belong to must have owned the shares throughout the 24 months before the sale. During that period, while you or a related person held them, the company must have been a Canadian-controlled private corporation with more than 50% of its asset value used mainly in an active business in Canada, or held as certain shares or debts of connected corporations. Nobody else may have owned the shares in those 24 months.

As an illustration with round numbers, suppose you sell qualifying shares for a gain of $1,500,000 and the full $1,250,000 limit is available. The taxable capital gain is $750,000, the deduction is $625,000, and $125,000 remains taxable. Your own limit may be lower, so check it before you rely on the figure.

Cash piled up in the company, an investment portfolio or a holding company in the chain can cause the tests to fail. If a sale is two or more years away, ask for a review now, while there is still time to fix the structure.

How an asset sale is taxed

In an asset sale, the corporation reports each category of property it sells. If depreciable equipment sells for more than its undepreciated capital cost, the CRA says you may have to add a recapture of capital cost allowance to income, and that amount is generally business income rather than a capital gain. Any amount above the original cost is generally a capital gain. Selling for less than the remaining balance can instead produce a terminal loss. Goodwill and other intangibles are part of the price and are also treated according to the Income Tax Act’s rules for that property.

The price allocation matters, because each category is taxed differently. The agreement should say how the price is divided, and the buyer and seller should report consistent figures.

The corporation pays tax on its gain, and the money is still in the company. Paying it out to you normally means dividends, a topic covered in our article on how dividends are taxed in Ontario, and a possible capital dividend for the non-taxable part of capital gains. The lifetime exemption is described by the CRA for shares and farm or fishing property that an individual sells, so do not assume a corporation’s asset sale can use it.

When the buyer pays over several years

If you receive part of the price after the year of the sale, you may be able to claim a capital gains reserve, which defers part of the gain. You complete Form T2017, and generally the gain is included over five years at most. Longer periods apply in some transfers to children. Our article on the capital gains reserve walks through the mechanics.

You cannot claim a reserve in some cases, including when you sell to a corporation you control, or when you are not a resident of Canada at the end of the year or at any time in the following year. A reserve is also a credit risk, because the buyer’s payments fund the deferred tax. Discuss security, interest and what happens if payments stop.

Other points to check before closing

GST/HST can apply to the sale of a business’s assets. When the buyer acquires all or substantially all the property needed to carry on the business, generally 90% or more, and the buyer is a registrant whenever the seller is, they may jointly make an election on Form GST44 so that GST/HST does not apply to most of the sale. The CRA says the buyer files the election by a deadline tied to the first return on which the GST/HST would have been payable, and some supplies, such as certain leases and services, stay taxable, so confirm the details with your accountant.

Large gains can also affect the alternative minimum tax, whose calculation the CRA describes as changed, under proposed changes, for 2024 and later years. The CRA also describes a capital gains deduction for a sale to an employee ownership trust and, under proposed changes, to a worker cooperative. These are specialized, and each has its own election forms and conditions.

If you plan to retire or move abroad after the sale, mention it early, because residency can change what is available.

Records and reporting

Gather the share register, articles and amendments, past share issuances, purchase and financing documents, recent financial statements and the T2 returns for the 24 months before the sale. They show your cost base and support the exemption tests. The CRA calculates a lifetime deduction on Form T657, and if you have investment income or expenses in past years it also requires Form T936. Both can be needed for a large claim.

Report the sale on Schedule 3 of your personal return, then claim any deduction on line 25400. If a reserve applies, attach Form T2017. Keep the signed agreement, closing statement and a record of how the price was allocated with the return working papers.

Questions to ask before you accept an offer

Ask which structure gives the best after-tax result, using your own figures, and whether the buyer will pay more for assets to make up the difference. Ask whether the shares qualify for the exemption today and what would stop them from qualifying. Ask how much of the price is deferred, and who bears the tax risk if the buyer defaults.

Then ask how the money will reach you, and when. Our guide on closing a business covers the tax steps for a business that is winding up rather than selling. The tax advisory page explains how Sora can help you compare options. Do this early, because the best planning is done before an offer arrives.