Tax on Selling a Business in Canada | Launch Capital

The short answer: Tax is often the biggest single cost of selling a business, and the part owners plan for least. How you structure the sale can change what you keep by hundreds of thousands of dollars. This guide covers the basics for owners of Canadian private companies. It is general information, so confirm the details with a tax advisor before you sign anything.

The basics: capital gains

When you sell shares of your company for more than they cost you, the profit is a capital gain. In Canada, only part of a capital gain is taxable. The federal government had proposed raising the taxable portion above one-half for larger gains, but the Prime Minister cancelled that increase in March 2025, so the inclusion rate remains one-half. Check the current rules with your accountant before you rely on this, because tax law can change.

The lifetime capital gains exemption

The lifetime capital gains exemption (LCGE) lets you shelter part of the gain from tax when you sell qualifying small business shares. Budget 2024 raised the limit to $1.25 million for dispositions on or after June 25, 2024, and said indexation to inflation would resume in 2026. The 2026 figure may therefore be slightly higher, so confirm the current limit with the Canada Revenue Agency.

The exemption is lifetime and per person. If you use some of it on an earlier sale, less remains. If your spouse or family trust also owns shares, each qualifying shareholder may be able to claim their own exemption, which is why ownership structure matters well before a sale.

A hypothetical example: you sell your shares for a gain of $2,000,000 and can claim the full $1,250,000 exemption. The remaining $750,000 is a taxable capital gain, and one-half of that, $375,000, is added to your income. Your real result depends on your other income, your province and other rules, so use this only to see how the pieces fit.

Do your shares qualify?

The exemption applies only to qualified small business corporation (QSBC) shares. In general, three tests apply:

1. At the time of sale, the company is a Canadian-controlled private corporation and nearly all (at least 90%) of its assets are used mainly in an active business in Canada, or are shares or debt of connected companies that meet similar tests.
2. For the 24 months before the sale, the shares were owned only by you or someone related to you.
3. Throughout those 24 months, more than 50% of the company's assets were used mainly in an active business in Canada.

These tests catch many owners out. A company holding a large pile of cash or investments can fail the 90% test at the moment of sale. The usual fix is "purifying" the company by moving non-business assets out beforehand, which takes planning and time. Do not leave it to the month of the sale.

Share sale or asset sale?

This is the most important structural choice, and buyer and seller often want opposite things.

• Share sale: you sell the company's shares. Sellers usually prefer this because the LCGE may be available. Buyers often like it less, because they inherit the company's history and liabilities.
• Asset sale: you sell the company's assets and, usually, its business. Buyers usually prefer this because they pick the assets and can limit past liabilities. It is typically less attractive for sellers, because the LCGE does not apply and tax may fall on the company.

Buyers often ask for an asset sale to avoid inheriting unknown liabilities, and may offer a higher price to get one. A tax advisor can model the after-tax result of each structure so you can negotiate with real numbers.

Other tax points to raise early

• Allocation of the purchase price. In an asset sale, how the price is split between categories of assets affects how it is taxed.
• Earn-outs and deferred payments. Tax treatment can depend on how these are structured.
• Family trusts and holding companies. These can help with income splitting and multiple exemptions, but only if set up correctly and in time.
• Alternative minimum tax. Large gains can trigger it, so ask your advisor to test for it.

The practical takeaway

Start tax planning at least a year or two before you plan to sell. The structure that gives you the best after-tax result, the exemption and the purification of non-business assets all take time to arrange. See how to sell a business in Canada for where tax planning fits in the process.

Want to discuss your options?

Launch Capital is a Toronto venture capital firm and family office focused on technology and services businesses. If you run a Canadian technology or services business and want to discuss your options, contact us.

This article is general information, not tax or legal advice. Tax rules and limits change; confirm current figures with a qualified tax advisor and the Canada Revenue Agency.