There are various taxation issues that arise when selling a business.  It is important to understand your tax exposure before you even begin the sale process in order to determine where you stand financially before formal price negotiations begin with a buyer.  This article shall explore some different sale structures and how they may trigger different tax expenses for a seller.  It is critical to talk to a chartered account (ideally a tax specialist) to get proper professional guidance.

Who the seller is can determine how you are taxed
It is crucial to properly document exactly who the seller is.  Many business owners believe that they “personally” sell their business when, in fact, this may or may not be the case.  If you own a small business and are a sole proprietor then you certainly are the seller and gain from the sale is typically taxed at your personal marginal tax rate.  If you own the business as a partnership or via a limited company then there are more complex tax rules that apply that you must certainly consult your C.A. for.

Are you selling business assets or shares?

Asset Sale
If you are selling business assets then technically ‘you’ are not selling the business, the company is.  In an asset sale in Ontario, the sale is governed by the Bulk Sales Act and rules apply to what is sold, what liabilities can be left on the assets and other legalities that you should talk to your lawyer about.  From a tax perspective, you should know that in an asset sale the buyer and the seller most commonly agree on the allocation of the purchase price prior to completing the transaction.  More simply, a buyer and seller may elect to agree on what portion of the price is allocated to various assets classes and the difference between that amount and the purchase price is allocated to goodwill.  The key here is that assets and goodwill have a different tax treatment for a business seller. 

A seller usually would prefer to have a lower asset value allocation and a higher goodwill allocation.  This is due to a “recapture” value of assets that is usually taxed as regular income and goodwill over and above that is treated at the capital gain rate.  Again, consult with a professional accountant to clarify this with you.

Conversely, a business buyer typically prefers to have a higher asset value on the sale and a lower goodwill value.  This is because a higher asset valuation can be depreciated more quickly than goodwill, thereby accelerating any tax savings for the business buyer.

Share Sale
In a share sale (also know as a "stock" sale) scenario a business owner sells the entire legal entity to a buyer which would usually include assets as well as some level of liabilities, working capital and equity included.  A share sale usually has a more favorable tax treatment to a business seller in that they can maximize capital gains tax treatment on the sale of the business.

A share sale is typically more complex to execute for a small business sale and the majority of business sales that occur in Ontario are asset sales.  In addition, when shares of a company are sold, legal recourse tends to follow the company to the new owners as well as contracts and other usual corporate history.

There are certainly other taxation issues involved in a sale as well that you must consider.  For example GST/HST taxes in the province of Ontario is an issue raised in a business sale.  Depending how you structure the deal, the federal & provincial taxation exposure will vary and that is why it is important to meet with a C.A.

As illustrated, selling a business can be a challenging endeavour if a business owner is not armed with all of the facts.  It is important to work with legal and accounting professionals to assist you, as well as business brokers to outline the overall process.


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