Two entrepreneurs each sell their SME for $5 million. The first walks away with about $4 million in their pocket. The second, with $3.35 million. The difference: some $650,000. The only thing that sets them apart is what was sold — the company’s shares or its assets.
The sale price alone, then, does not tell you what the seller will actually receive. “Before talking price, you first need to determine what the sale will actually bring in once the tax is paid,” notes Alexandre Lacasse, tax lawyer and partner at EC2 Finance. “Two structures, two tax bills: our clients are often surprised to find that the same $5 million can be worth several hundred thousand dollars less depending on what is sold.”
For a business owner preparing to sell, this exercise should come before any price negotiation.
| Illustrative scenario — SME sold for $5 million | Share sale | Asset sale |
| Transaction price | $5,000,000 | $5,000,000 |
| Tax paid by the company (recapture + capital gain) | — | ≈ $900,000 |
| Seller’s personal tax (gain after $1,275,000 exemption / dividends to extract the funds) | ≈ $1,000,000 | ≈ $750,000 |
| Net in the seller’s pocket | ≈ $4,000,000 | ≈ $3,350,000 |
Note: This scenario assumes a $5 million price allocated between largely depreciated assets and goodwill, a near-zero adjusted cost base for the shares, a sole shareholder resident in Quebec who is fully eligible for the exemption, and 2026 marginal tax rates. A different asset mix — or small business deduction room still available — could significantly narrow the gap.
A two-tier tax bill
Why can an asset sale cost the seller more? Because it generally triggers two levels of taxation.
First, it is the company that sells its equipment, goodwill and other assets. If some of that property has already been largely depreciated, the transaction can trigger what is known as “recapture”: part of the tax deductions claimed in past years is added back to the company’s taxable income. A capital gain may also be realized on assets that have appreciated in value.
The non-taxable portion of a capital gain can be paid out to the shareholder tax-free through the capital dividend account. But once the company’s tax has been paid, the owner still has to extract the remaining funds, usually in the form of dividends — triggering a second tax bill.
In the example above, the company’s tax would come to roughly $900,000, plus some $750,000 in personal tax to extract the funds. These are orders of magnitude, but they show just how much the structure of a transaction can change the final outcome.
Shares favour the seller — if they qualify
The dynamic is different when an entrepreneur sells the shares of their company. They are then taxed personally on their capital gain and, if they meet the applicable conditions, can claim the lifetime capital gains exemption, which is capped at $1.275 million in 2026 for a qualifying shareholder (the limit is indexed annually). Some family structures can also make it possible to multiply this exemption.
That is why, as a general rule, sellers favour shares while buyers often prefer assets.
A buyer acquiring assets can generally be more selective about what they take on, leave certain liabilities with the seller, and benefit from a new tax base that allows them to depreciate the acquired assets.
Conversely, by buying the shares, the buyer takes over the company along with its history and its potential risks. Hence the need for more thorough due diligence.
A bill that changes hands
However, the tax advantage the seller gains on a share sale does not simply vanish. The assets remain in the company with their existing tax attributes. The buyer therefore inherits, among other things, a potential tax liability that could materialize down the road. This is what is known as latent tax.
“Latent tax never disappears: it changes hands,” explains Alexandre Lacasse. “A seller who sells their shares passes that bill on to the buyer — and a well-advised buyer puts a number on it before even submitting an offer.”
The buyer may therefore try to pay less for the shares to account for this future tax. For the seller, accepting a slightly lower price does not necessarily mean losing out. Rather, they are sharing with the buyer a tax bill that exists either way.
In other words, what you need to compare is the net amount that will end up in your pocket — not just the figures written on the offers.
Run the numbers before negotiating
This is where the calculation becomes a negotiating tool. Waiting until the price has been agreed seriously complicates discussions. The worst-case scenario: an entrepreneur who discovers the tax bill after accepting an offer. Too many sellers still negotiate the top line without having calculated the bottom line.
“Before the letter of intent or offer to purchase, structure is part of the negotiation,” adds Alexandre Lacasse. “After that, it becomes a concession. Our job is to put the after-tax net of both scenarios on the table before the price gets anchored.”
Every transaction is different, however. The company’s tax history, the mix and tax value of its assets, the shareholders’ personal circumstances and the buyer’s profile can all narrow or widen the gap. The stakes can be especially high when the company owns real estate.
Nor is the choice always binary: some hybrid structures make it possible to sell the shares after first taking certain assets out, or vice versa. Finally, non-tax frictions also weigh in the balance — assignment of contracts and permits, transfer duties when a building changes hands, termination and rehiring of employees, and GST/QST treatment.
If you are considering selling your business, the right starting point is therefore to have both scenarios quantified before negotiating. This is the kind of analysis EC2 carries out ahead of a sale process to help business owners compare their options on a like-for-like basis.
To dig deeper into buyer-side issues, see also our article Buying assets or shares? Expert advice on structuring your acquisition, which covers, among other things, the transfer of contracts and permits, the scope of due diligence depending on the chosen structure, and the use of representations and warranties insurance.
