Asset sale vs. share sale and the Lifetime Capital Gains Exemption

Most Canadian practice owners operate through a professional corporation. When you sell, you'll either sell the practice's assets out of the corporation, or sell the shares of the corporation itself. Buyers and sellers usually prefer opposite answers, and the tax consequences are significant.

Asset sale

In an asset sale, your corporation sells goodwill, equipment and other assets to the buyer. Buyers like this: they get a fresh tax cost on the assets (more depreciation) and don't inherit the corporation's history or liabilities. For sellers, proceeds land in the corporation first, so getting the money out personally can mean a second layer of tax, and the Lifetime Capital Gains Exemption doesn't apply.

Share sale

In a share sale, you sell your shares directly. If the shares qualify as qualified small business corporation (QSBC) shares, you may be able to shelter a large capital gain with the Lifetime Capital Gains Exemption. The exemption is $1.25 million for dispositions on or after June 25, 2024 and is indexed to inflation from 2026. Family members who are shareholders may each have their own exemption.

Qualifying for the exemption

• At the time of sale, substantially all (90% or more) of the corporation's assets must be used in an active business carried on primarily in Canada.
• Throughout the 24 months before the sale, more than 50% of the assets must have been used in the active business.
• The shares generally can't have been owned by anyone other than you or a related person during those 24 months.

Many professional corporations accumulate investment portfolios over the years, which can cause them to fail these tests. Moving those assets out, often called purifying the corporation, takes planning and, because of the 24-month test, time.

What about the capital gains inclusion rate?

The proposed increase to the capital gains inclusion rate announced in 2024 was cancelled in March 2025. The inclusion rate remains one-half.