You've built a successful US operation. Whether it's a manufacturing facility in Michigan, a tech company in Austin, or a distribution business in Florida, your US business has real value now.
And someone wants to buy it.
This should be good news. But here's the problem: if you're not careful about how you structure the sale, you could end up paying 55% or more in combined taxes. That's not a typo. On a $2 million gain, you could lose over $1 million to taxes simply because you didn't understand the difference between selling shares and selling assets.
Let me show you how to avoid this trap.
The Problem: Why Asset Sales Are a Tax Disaster
Here's what typically happens. A buyer approaches you and says they want to buy your US business. Their lawyer sends over a purchase agreement. You're excited. You sign it. Deal closes.
Then your accountant calls with bad news. Really bad news.
Let's use real numbers to show you what happened.
The Asset Sale Nightmare (What You Want to Avoid)
Your US corporation has assets worth $2 million. You sell those assets for $2 million, creating a $2 million capital gain in the US corporation.
Here's the tax breakdown:
In the US Corporation:
- Capital gain: $2,000,000
- US federal corporate tax (21%): $420,000
- Amount left after tax: $1,580,000
But wait, the money is still stuck in the US corporation. You need to get it out.
Dividend to Your Canadian Corporation:
- Dividend amount: $1,580,000
- US withholding tax (5%): $79,000
- Amount received in Canada: $1,501,000
So far, you've paid $499,000 in US taxes on your $2 million gain. That's about 25%. Not great, but manageable, right?
Wrong. Because Canada isn't done with you yet.
When You Take the Money Out in Canada:
- You withdraw the dividend as an individual
- Canadian personal tax on eligible dividend (approx. 39%): $585,000
- Net amount you actually keep: $916,000
Let's do the math:
- Started with: $2,000,000 gain
- Ended up with: $916,000
- Total tax paid: $1,084,000
- Effective tax rate: 54%
You just gave up more than half your gain to taxes. And this assumes you're in Ontario. In some provinces, it's even worse.
The Solution: Sell Shares, Not Assets
Now let's look at what happens when you structure this correctly from the start.
Instead of selling the assets inside the US corporation, you sell the shares of the US corporation itself.
Here's what happens:
- You (or your Canadian holding company) sell shares of US corporation: $2,000,000
- US tax on sale of shares by non-resident: $0 (provided the assets aren't mainly US real estate)
- Canadian tax on capital gain: 50% included, roughly 27% effective rate: $540,000
- Net amount you keep: $1,460,000
Same sale. Same $2 million. But you keep an extra $544,000 simply by selling shares instead of assets.
That's more than half a million dollars. On a $10 million sale? You just saved over $2.7 million.
Why Buyers Prefer Asset Sales (And How to Handle It)
Here's the complication: buyers often want to buy assets, not shares. Why?
From the buyer's perspective, asset purchases are better because:
- They get a "step-up" in the tax basis of the assets
- They don't inherit any unknown liabilities from the corporation
- They can pick and choose which assets they want
- They may get better tax deductions going forward
So you want to sell shares. They want to buy assets. What do you do?
Strategy 1: Negotiate the Price
If the buyer insists on an asset purchase, the price needs to reflect the tax hit you're taking. Using our example:
- Share sale would net you $1,460,000
- Asset sale would net you $916,000
- Difference: $544,000
The buyer needs to pay an additional $544,000 (or split the difference) to make you whole. If they won't, walk away. You're literally giving them $544,000 of your money if you accept their offer.
Strategy 2: Structure It as a Share Sale with Warranties
You can address the buyer's concerns about liabilities by:
- Providing strong warranties and representations about the business
- Setting up an escrow for potential claims
- Offering a longer due diligence period
- Getting liability insurance (reps and warranties insurance)
These cost money, but nowhere near the $544,000 you'd lose on an asset sale.
Strategy 3: The Hybrid Approach
In some cases, you might sell shares but agree to have the corporation distribute certain assets or cash before closing. This gives the buyer some of the benefits they want while preserving the share sale treatment for you.
But this needs careful structuring. Get this wrong and the CRA or IRS might recharacterize the whole thing.
What If You Have a US LLC Instead?
LLCs are different. The good news is that it doesn't matter as much whether you sell units (like shares) or the LLC sells its assets. Either way, the gain flows through to you personally.
For a US LLC:
- US tax on capital gain: 20% federal (plus possible state tax)
- Canadian tax on capital gain: roughly 27%
- Foreign tax credit for US tax paid
Your effective total rate will be around 27% to 30%, depending on your province and whether there's state tax.
The key here is making sure you get it out as a capital gain, not a dividend. If the LLC distributes the proceeds, you want it structured as a redemption or liquidation, not an ordinary distribution.
The Basis Trap You Need to Know About
Here's a technical point that catches people by surprise: Canada and the US calculate your cost base (adjusted cost basis or ACB) differently for LLCs.
In Canada:
- The LLC is treated as a corporation
- Income earned doesn't increase your ACB
- Dividends don't decrease your ACB
In the US:
- The LLC is treated as a partnership (if multi-member)
- Income increases your basis
- Distributions decrease your basis
After a few years of operations, your Canadian ACB and US basis can be wildly different. This means:
- Your taxable gain in Canada might be higher than in the US, or vice versa
- You need to track both separately
- You can't just assume they're the same
If you don't track this, you might accidentally report the wrong gain and trigger an audit.
The Critical Timing Issue
Here's something that can really hurt you: if you sell a US LLC as a Canadian individual, you need to make sure the US tax and Canadian tax happen in the same calendar year.
Why? Because foreign tax credits don't carry over for individuals.
Bad scenario:
- LLC sells assets in December 2025
- You pay US tax in April 2026 (with extension)
- But Canadian tax return for 2025 is filed in 2026
- You have US tax paid in 2026 that you can't credit against 2025 Canadian tax
- You pay full Canadian tax and can't use the US tax credit
Good scenario:
- Plan the timing so everything happens in the same year
- File US and Canadian returns for the same tax year
- Foreign tax credits work properly
This is fixable with good planning. It's a disaster if you don't think about it.
What You Need to Do Right Now
If you're thinking about selling your US business in the next few years, here's your action plan:
1. Check Your Current Structure
Do you own a US corporation or a US LLC? Is it owned personally or through a Canadian holding company? This determines your options.
2. Document Your Basis
Start tracking your adjusted cost base now, both for Canadian purposes and US purposes. Don't wait until you're negotiating a sale.
3. Clean Up the Business
If you want to sell shares, make sure the corporation is clean:
- No personal assets mixed in
- All employment taxes paid
- Corporate records up to date
- No pending lawsuits or claims
Buyers won't pay for shares of a messy corporation.
4. Talk to Your Advisors Early
Don't wait until you have an offer. Talk to your accountant and lawyer about:
- Whether a share sale is realistic for your business
- What the minimum acceptable price would be for an asset sale
- Any restructuring that should happen before you sell
- Tax planning opportunities (like crystallizing your capital gains exemption if applicable)
5. Set Your Walk-Away Number
Know your after-tax proceeds under different scenarios. If a buyer insists on an asset purchase at the original price, you need to know what that really means for your pocket and be willing to say no.
The Bottom Line
The difference between a share sale and an asset sale can easily be 25% of your proceeds or more. On a multi-million dollar transaction, that's real money. Life-changing money.
But here's the thing: once the deal is signed, it's too late to fix. The structure of the sale is negotiated upfront, and you can't change it after closing.
I've seen business owners lose hundreds of thousands of dollars because they didn't understand this difference until their accountant called them after the closing. Don't be that person.
The good news? This is completely avoidable. With proper planning, most US businesses owned by Canadians can be sold in a tax-efficient way. You just need to think about it before you're sitting across from a buyer.
If you're building a US business with the intention of selling it someday, make sure you're building it in a way that can be sold efficiently. That conversation needs to happen now, not when someone makes an offer.
Because by then, your options are already limited by decisions you made years ago.
