Buying or selling a business in Ontario: shares or assets, and everything that follows

Most owners sell a business once. The person across the table has usually done it before, with a lawyer and an accountant who do this all year. That asymmetry decides more outcomes than any rule in the Income Tax Act. The useful thing is that Ontario deals follow a predictable shape, and the decisions that cost the most get made early, while everything is still changeable.

In a share sale you buy the corporation itself, and everything it owns and owes comes with it: the contracts, the lease, the equipment, the tax history, the claim nobody mentioned. In an asset sale you buy a list. Equipment, inventory, customer lists, the business name, goodwill, and whichever contracts the other side agrees to assign. The corporation stays behind with the seller, and so does most of its past. That one choice moves the tax bill, the due diligence, and what happens to the staff.

Selling shares produces a capital gain, and half of a capital gain is taxable. The proposed increase to that inclusion rate was cancelled in March 2025, so the one-half rate still applies. The bigger prize is the lifetime capital gains exemption. An individual resident in Canada who sells qualified small business corporation shares can shelter a lifetime total of $1,250,000 of the gain, indexed to inflation from 2026, which puts the 2026 limit at $1,275,000. The CRA calls it the capital gains deduction↗, and each individual has their own, which is why spouses and family trusts so often hold shares in owner-operated corporations. If you have been counting on the Canadian Entrepreneurs' Incentive on top of that, stop. The November 2025 federal budget cancelled it.

Qualified carries three tests, and all of them look backwards. On the day of sale, at least 90% of the fair market value of the corporation's assets must be used in an active business carried on primarily in Canada. Over the preceding 24 months, more than 50% of asset value must have been used that way. Through those same 24 months the shares must have been owned by you or someone related to you.

Surplus cash, an investment portfolio, or a rental property inside the corporation can fail the 90% test on the one day it matters. Cleaning that up, which accountants call purification, is ordinary work when there is time and nearly impossible once an offer is in hand. If the business was never incorporated, start with how Ontario business structures compare, because there are no shares to sell and no exemption to claim until there is a corporation.

The first reason is exposure. Unremitted source deductions, an HST reassessment that has not arrived yet, a former employee's dismissal claim, a supplier contract the seller genuinely forgot: in a share sale all of it travels, because the legal person that owes those obligations is the thing you just bought. Indemnities push some risk back, and they work only while the seller is solvent and findable.

The second is tax. The buyer's cost for each asset is what the buyer paid, so depreciation restarts from that number. Goodwill goes into capital cost allowance Class 14.1 and depreciates at 5% a year on a declining balance. The allocation of the price across the assets has to be reasonable. Section 68 of the Income Tax Act lets the CRA substitute its own figure where it is not, whatever the agreement says, so an allocation the two sides genuinely argued over survives scrutiny better than one drafted to suit whoever held the pen. Buyers want weight on inventory and equipment; sellers want weight on goodwill, which yields a capital gain where depreciable property can trigger fully taxable recapture. Settle the numbers in the agreement and have both sides commit to filing on them.

Close the gap by pricing it. Have the accountants run both structures for both sides in real dollars before anyone takes a position. The usual landing spot is a share sale at a price the buyer would not have paid for the assets alone, with the extra risk covered by broader representations and a bigger holdback.

1. 01Confidentiality agreement. Signed before any financial statement changes hands. Word that a business is for sale reaches its staff, its landlord, and its competitors long before a deal closes.
2. 02Letter of intent. Sets price, structure, and timetable, usually non-binding on those points. Other clauses are meant to bind: exclusivity, confidentiality, who pays if the deal dies, governing law. Say in the document which paragraphs bind, or you get a fight about whether a deal already exists.
3. 03Due diligence. Typically 30 to 60 days for a small business, running while exclusivity holds other buyers off.
4. 04Purchase agreement. Representations, warranties, indemnities, closing conditions, the holdback, and the restrictive covenants.
5. 05Closing. Conditions satisfied, consents in hand, money released, transfer documents signed the same day.
6. 06Transition. The seller usually stays on for a defined period. Put the length, the pay, and the duties in writing; an open-ended promise to help ends badly for both sides.

Due diligence in a small business sale is a document exercise. A seller who assembles this before going to market shortens the process by weeks and gives away less leverage:

• The minute book: articles, by-laws, resolutions, the share register, and the register of individuals with significant control that Ontario private corporations have had to keep since January 1, 2023.
• Three years of financial statements, the filed tax returns behind them, and confirmation that the HST and payroll accounts are current.
• Every material contract, read for the assignment clause in an asset deal and the change of control clause in a share deal.
• The lease, whatever the landlord needs in order to consent, and an estoppel certificate confirming no default is outstanding.
• A full employee list: hire date, wage, hours, whether a signed contract exists, and any unpaid vacation, bonus, or commission.
• Personal Property Security Act searches against the corporation and the business name, plus corporate profile, litigation, and execution searches.
• Trademark registrations, domain names, and written answers about who owns the brand.
• Licences and permits for the actual use, and municipal confirmation that the zoning allows it at that address.

Gaps here are information, not automatically deal breakers. Missing minute books and trademarks registered in a founder's personal name are ordinary in owner-operated businesses. What matters is that they surface while the price is still open.

A representation is a statement of fact the seller stands behind with money: the statements are accurate, the taxes are remitted, there is no litigation, the employee list is complete. The indemnity says who pays if one proves wrong. Representations survive closing for a stated period, and tax representations run longest, because a reassessment can arrive years later. Section 22 of the Limitations Act, 2002 lets parties to a business agreement vary the basic two-year limitation period by contract, so a survival clause holds.

None of it is worth more than the seller's ability to pay when the claim lands. That is the holdback's job. A portion of the price, commonly 10% to 20%, sits in a lawyer's trust account and is released as the survival periods expire. Sellers resist holdbacks and buyers should not give them up cheaply. It is the only term that turns an indemnity into money you can reach.

Employees transfer with the business, asset sale included

This is the most common misunderstanding in Ontario asset purchases. Section 9 of the Employment Standards Act, 2000 deems service with the seller to be service with the buyer where the buyer hires the employee, so continuity of employment↗ carries across the sale. Vacation, leave eligibility, notice of termination, and severance pay are all calculated on combined service. Section 9(2) removes continuity only where the buyer hires more than 13 weeks after the earlier of the employee's last day with the seller and the day of the sale.

The common law adds to this. In Manthadi v. ASCO Manufacturing, the Court of Appeal for Ontario held that prior service, while it does not transfer automatically, counts as experience the purchaser is buying and feeds into reasonable notice. A buyer who lets a twenty-year employee go four months after closing is not facing a four-month employee. Price that exposure, allocate it in the agreement, and decide before closing who gets a new written contract. As hiring your first employee in Ontario sets out, a contract signed after someone has already started, with nothing new given in exchange, is generally unenforceable.

The lease can quietly control the outcome

For most retail, restaurant, and service businesses the lease is the business. Section 23 of the Commercial Tenancies Act deems consent to an assignment not to be unreasonably withheld, unless the lease expressly says otherwise. Plenty of them say otherwise, and then the landlord holds a veto. Share sales are not automatically safe either, because a change of control clause can trigger the same consent without a single asset moving. A franchised business carries a second gatekeeper, and buying a franchise in Ontario covers the consent and transfer fee involved. Read both documents in the first week of the deal, not the last.

The Bulk Sales Act is gone, and nothing directly replaced it

Ontario repealed the Bulk Sales Act on March 22, 2017, ending the last bulk sales legislation in Canada. It used to force a seller of substantially all its stock to account to trade creditors first. The substitute is diligence you run yourself: Personal Property Security Act searches for registered security against the assets, a holdback large enough to cover what the searches missed, and the statutory clearance certificates. Without an Ontario retail sales tax clearance certificate↗, a purchaser can be liable for RST the seller owed at the time of sale. Without a WSIB purchase certificate↗, section 146 of the Workplace Safety and Insurance Act, 1997 makes the buyer liable for the seller's outstanding WSIB amounts.

HST: register first, then elect

An asset sale is a taxable supply, so HST applies unless something takes it out. Section 167 of the Excise Tax Act is that something: where the buyer acquires all or substantially all of the property needed to carry on the business, the parties jointly elect on Form GST44 and no tax applies to the transfer. The precondition that gets missed sits in subsection 167(1.1): where the seller is a registrant, and the seller of an operating business almost always is, the buyer has to be a registrant too. A numbered company incorporated the week before closing and not yet registered cannot elect, and HST becomes payable on the full price. Register the buyer well before closing.

The non-competition covenant you can actually enforce

Ontario banned non-compete agreements↗ in employment contracts effective October 25, 2021, with two narrow exceptions: genuine executives, and a sale of business. The second is drafted more tightly than people assume. It covers a business operated as a sole proprietorship or a partnership where the seller becomes an employee of the purchaser immediately after the sale. Sell the shares of a corporation and stay on as an employee, and that exception does not reach you on its terms.

The answer is placement. The ban governs non-competes between an employer and an employee. A covenant given by a vendor in the purchase agreement, in exchange for the price paid for goodwill, is a commercial covenant, and Ontario courts enforce reasonable ones. In Payette v. Guay, the Supreme Court of Canada confirmed that such a covenant is assessed far more generously: it stands unless the seller proves its scope unreasonable, the reverse of the employment presumption. So it belongs in the purchase agreement, given by the seller as seller, with a duration and territory matching what the buyer is paying for.

Closing is not the end of the file. In a share sale, changes to directors and officers must be reported through the Ontario Business Registry↗ within 15 days under the Corporations Information Act, with the minute book, share register, and control register updated to match. In an asset sale, business name registrations transfer and the buyer opens its own CRA accounts. Both deals need insurance moved, bank signing authorities changed, and suppliers, customers, and the landlord told in a sequence you agreed on in advance.

A lawyer earns the fee at a few specific moments here. The day the letter of intent is drafted, because that document quietly sets the structure and the leverage for everything after it. The day the employee and lease positions get confirmed, because both move the price and neither is fixable at closing. And two years before any of that, when the shares can still be made to qualify. Telesh Law Firm Professional Corp handles purchases and sales of Ontario businesses from the confidentiality agreement through the post-closing filings, on either side of the table.

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This article is general information, not legal advice, and does not create a solicitor-client relationship. It is current as at its publication date and is not revised as the law changes. For advice on your specific situation, book a consultation or call 416-639-0887.

Written by

Caleesis Telesh

Founder & Principal Lawyer

LL.B. · B.A., York University · Member, Law Society of Ontario

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