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Asset Sale vs. Share Sale Key Differences for Buyers and Sellers
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One of the most fundamental decisions in any business acquisition. Buyers and sellers almost always want the opposite structure and understanding why is essential to negotiating the deal.
The Basic Distinction
Share sale: The buyer purchases shares of the target corporation from the shareholders. The corporation with all its assets, liabilities, contracts, employees, and history transfers intact to the buyer. The buyer is purchasing the entire legal entity.
Asset sale: The buyer purchases specific assets from the target corporation. The corporate entity remains with the seller. The buyer chooses exactly what to take and what to leave behind.
Why Buyers Prefer Asset Sales
- Select only what you want: Exclude specific liabilities, contracts, or obligations
- No inherited liabilities: Unknown tax assessments, lawsuits, and employee claims stay with the selling corporation
- Tax step-up: Allocate purchase price to depreciable assets for a higher cost base going forward
- Cleaner due diligence: Review only the assets being acquired, not the full corporate history
Why Sellers Prefer Share Sales
- Capital gains treatment: Proceeds are capital gains (50% inclusion rate), not ordinary income
- Lifetime Capital Gains Exemption: If the corporation is a Qualifying Small Business Corporation (QSBC), sellers may shelter up to approximately $1M of gains from tax entirely
- Simplicity: One transfer (shares) versus transferring dozens of individual assets and seeking assignment consents
- Contracts transfer automatically: No need to obtain third-party consent for assignment
Key Comparison
| Issue | Share Sale | Asset Sale |
|---|---|---|
| What transfers | The whole corporation | Selected assets only |
| Liabilities | All stay with the corporation buyer assumes | Buyer selects; unknowns stay with seller |
| Seller tax | Capital gains; LCGE potentially available | Mix of capital gains and income depending on asset type |
| Buyer tax | No cost base step-up on underlying assets | Step-up available on depreciable assets |
| Contracts and leases | Transfer automatically with the corporation | Assignment requires counterparty consent |
| HST | No HST on share transfers | HST may apply to assets; Land Transfer Tax on real property |
Bottom line: Sellers almost always prefer share sales for tax reasons. Buyers almost always prefer assets to avoid inherited liabilities. The final structure is a negotiation and the tax consequences for both sides are significant enough that this decision must always be made with qualified legal and accounting advice before any LOI is signed.