Sale of a Business
The decision between selling shares and selling assets turns on a handful of technical issues that most business owners get wrong without a CPA who understands them. Custom written for CPAs advising owner-managers on the tax consequences of selling a business.
The choice between a share sale and an asset sale determines whether a client uses the capital gains exemption, whether retained earnings come out at 27% or 47%, and whether an earnout is capital gains or ordinary income. This course covers QSBC qualification and purification, the retain‑and‑sell‑cash strategy, CGE crystallization and its risks, pre‑sale planning with safe income strips, sale via share redemption and the deemed dividend trap, asset sale implications including recapture and the capital dividend account, replacement property rules, and the non‑CCPC structure for deferring capital gains tax on large transactions.
ABOUT THE COURSE
When a client sells their business, the structure of the transaction determines the tax outcome more than any other single factor. A share sale preserves access to the capital gains exemption, allows retained earnings to come out at the 27% capital gains rate rather than 47% on a dividend, and enables the retain‑and‑sell‑cash strategy where accumulated corporate funds are sold as part of the share price. An asset sale has two levels of taxation, no CGE access, and earnout payments taxed as ordinary income under s.12(1)(g). Understanding which structure the client needs and when to start planning for it is the core competency this course develops.
The course works through the technical conditions that determine whether a sale of shares delivers its full potential:
- QSBC share conditions: the 90% active asset test, the 50% test over the prior 24 months, and why cash accumulation in the corporation jeopardizes qualification
- Purification techniques to bring shares back into QSBC status before a sale, including preferred share issuances and holdco transfers
- CGE crystallization: when and why to lock in the exemption using an internal s.85 transaction, the risk of crystallizing on the wrong shares, and the TOSI implications for minors
- The retain‑and‑sell‑cash strategy: deliberately accumulating corporate funds, crystallizing the CGE first, then allowing the corporation to go offside while the buyer acquires the cash at a capital gains rate
- Safe income strips and pre‑sale planning: why paying an inter‑corporate dividend out of safe income before a sale converts a capital gain into a dividend when later withdrawn
- Sale via share redemption and the deemed dividend trap: the case study where a client received $2 million over 10 years as a deemed dividend at 47% rather than a capital gain, owing $900,000 in tax on $200,000 in cash received
- Multiplying the capital gains exemption among family members through trust structures and the subsection 55(2) caution on dividends paid to holdco
The asset sale analysis runs in parallel. Goodwill now produces a capital gain on sale rather than active business income, which has narrowed the gap between share and asset sale outcomes but not eliminated it. Recapture on depreciable property is still ordinary income. The capital dividend account accumulates from the non‑taxable portion of capital gains and can be paid out tax‑free, which creates streaming opportunities when buyers include non‑residents, public companies, or tax‑exempt entities who are indifferent between capital and taxable dividends. In the right circumstances, this can reduce the effective rate on a capital gain to as low as 10% for Canadian individual shareholders on an asset sale — but the structure requires careful analysis.
The course draws directly on the rate environment and structural changes that have shifted sale planning since 2016. Corporate tax rates have dropped from 50% in 1972 to 26.5%, making deferral more powerful than ever. Goodwill treatment changed in 2016, altering the asset sale calculation. The capital gain rate advantage over dividends is now 12% to 20% depending on the rate environment. These are not abstract observations — they are the numbers that determine whether a client nets $44 or $64 on every $100 of corporate income, and understanding them is what distinguishes a CPA who advises on business sales from one who only records them.
Get the framework to structure a business sale correctly: QSBC qualification, CGE crystallization, safe income planning, and the full share vs. asset sale comparison in one course. Learn at your own pace with instant access.
Sale of a Business
Seminar Snapshot
Sale of a Business
Special Topics · Course Syllabus
- Corporate tax rate: 50% in 1972 to 26.5% today
- Small business rate: 25% to 12.5%; limit from $50,000 to $500,000
- Active income deferral: 27% to 40% depending on rate
- Capital gain at 27% vs. eligible dividend at 39% or 47%
- The 2016 goodwill change: now a capital gain with RDTOH treatment rather than active business income
- Deliberately accumulate income in the corporation at 12.5% or 26.5%
- Sell the shares including all accumulated assets for a capital gain
- Numerical comparison: dividend extraction vs. capital gain on $100 of high-rate and low-rate income
- High-rate: 9% net advantage for capital gain; low-rate: 17% net advantage
- Implication: crystallize the CGE first, then allow the corporation to go offside with cash
- Gain realized by an individual or trust paid to an individual
- Unused CGE balance not eroded by CNIL or allowable investment losses
- Shares must be QSBC shares at time of disposition
- 90% active asset test: cash accumulation risks disqualification
- 50% active asset test over prior 24 months: harder to cure retroactively
- Crystallize and then accumulate: lock in the cost base before cash grows beyond thresholds
- U.S. sub held directly by Canco: bad — foreign assets contaminate the active asset test
- U.S. sub held as sister company: good — keeps Canco's asset test clean
- Single holdco over two Cancos: bad — holdco contaminated by passive Canco 2
- Separate holdcos over separate Cancos: good — isolation maintained
- Trust with cash flowing to holdco: caution — s.55(2) risk on inter-corporate dividends; pay dividends regularly to build safe income
- Example A: Opco FMV $3M with retained earnings; introduce holdco via preferred shares; pay inter-corporate dividend to reduce Opco's passive assets
- Example B: B Family Trust holds Opco; $1M dividend to holdco pre-sale; reduces purchase price but preserves CGE eligibility
- Purification example: $5M Opco with $1M redundant assets; issue preferred shares, transfer to holdco, redeem; holdco gets 20% of Opco safe income
- Paying retained earnings as an inter-corporate dividend tax-free reduces the sale price
- But converts what would be a capital gain on sale into a future dividend when withdrawn from holdco
- Safe income strip not necessarily beneficial: calculate the after-tax on both paths before proceeding
- Safe income must be calculated precisely — only income that has been taxed and retained qualifies
- Shares currently qualify but may not in the future as cash accumulates
- CNIL balance may reduce the available exemption later
- Exemption could be repealed or limited by future legislation
- Locks in a high ACB — enables the retain‑and‑sell‑cash strategy
- QSBC crystallization does not trigger TOSI for adults
- Risk: may use exemption on wrong shares if value declines; exemption is never actually realized
- Risk: QSBC crystallization triggers TOSI for minors — never crystallize for children under 18 in a non-arm's length context
- Internal s.85 transaction: simplest method; no new corporations; elect at precise amount
- Exchange common shares for preferred shares by sale to the corporation and issuance of preferreds
- Crystallization and Kiddie Tax: gains distributed to minors through trust re-characterized as taxable dividends
- Redemption of shares creates a deemed dividend to the shareholder under the Act
- All taxable at time of redemption even if proceeds paid over 10 years — no reserve available unless staged redemption
- No capital gains exemption available on deemed dividend
- If not designated as eligible dividend by the corporation: taxed at 47%
- Client's shares redeemed for $2M payable over 10 years; client assumed capital gain, CGE, and a reserve
- Result: deemed dividend, no CGE, no reserve, no capital gain, taxed at 47%
- Tax owed: approximately $900,000 on $200,000 in cash received at time of assessment
- Lesson: share redemption of a Canadian private company produces a dividend unless paid-up capital is unusually high
- Tax paid by the corporation that sells the assets — not the shareholder directly
- Recapture of CCA: ordinary income, taxed as active business income
- Goodwill: now a capital gain since 2016, goes through the refundable tax system
- Non-taxable portion of capital gains adds to the capital dividend account — available for tax-free distribution
- No CGE available on asset sale
- Gain may be larger than on share sale due to inside vs. outside basis differences
- Earnouts on asset sales: s.12(1)(g) applies — proceeds based on production or use are ordinary income
- CRA's administrative position allowing capital gains treatment on earnouts applies to share sales only, not asset sales
- CDA streaming opportunity: direct capital dividends to Canadian individual shareholders; direct taxable dividends to non-residents, public companies, or tax-exempt entities
- Right buyer mix can reduce effective rate to as low as 10% for Canadian shareholders on an asset sale
- Applies to defer gain or recapture on: capital property other than shares (s.44(1)), depreciable property including goodwill (s.13(4)), and eligible small business corporation shares (s.44.1(2))
- Conditions: replacement property must be for same or similar business, same or similar purpose, in Canada if former property was in Canada
- One-year window for regular dispositions; two years if expropriation
- Must spend at least the full proceeds to achieve a complete rollover
- ESBC share rules: complex, rarely used; ACB of replacement shares reduced by an ACB reduction amount
- CCPC capital gain: taxed at approximately 50% in the corporation with a dividend refund mechanism on distribution
- Non-CCPC alternative: capital gain taxed at 26.5% (13.25% on the taxable half); still generates capital dividend account
- Structure: introduce a foreign voting shareholder to remove CCPC status before the sale; capital gain flows to holdco
- Significant deferral on large transactions (millions and above); not practical for smaller gains
- Tax rate comparison: CCPC 28.6% overall vs. non-CCPC 27.6% — the advantage is the deferral, not the final rate
- Carries risk; not appropriate without thorough analysis of alternatives first
Meet Your Presenter
Michael Cadesky
Michael Cadesky is the managing partner at Cadesky Tax and a committed contributor to the tax and accounting professions since 1980, earning the title of Fellow from CPA Ontario. He is a past governor of the Canadian Tax Foundation, past chair of STEP Canada and STEP Worldwide, and past chair of the CPA Canada Tax Committee for Small and Medium-Sized Enterprises. Michael is also the co-author of 11 books on tax subjects and the author or co-author of numerous papers and articles on Canadian and international taxation.
FAQ
When can I access the course?
Immediately upon purchase. All course materials are available on-demand, allowing you to start learning right away.
How long do I have access?
You have 1-year all-access to the course materials. Watch and review the content as many times as you need, at your own pace.
Does the course provide CPD?
Yes. Upon completion, you will receive a verifiable CPD certificate indicating all instructional learning hours and required details.
What's included in the course?
Full video recording of the seminar, plus slides with detailed notes for your reference. Additional resources may be included.
Can I watch on any device?
Yes. Access the course from your computer, tablet, or phone — any device with internet access.