Buying a business: shares or assets, from the buyer’s chair

Buy the assets and your cost base is what you paid: the equipment, the inventory and the goodwill all start again at the purchase price, and the seller’s corporate history stays with the seller. Buy the shares and you get the corporation as it stands — tax pools already half spent, the payroll file, whatever is contingent and undiscovered — usually at a lower price, because the seller has an exemption riding on a share sale and knows it. Everything else follows from that fork, and it is decided in the letter of intent, not at closing.

Why the step-up is the buyer’s whole tax case

On an asset purchase, each thing you bought enters your books at the amount the agreement allocated to it. Depreciable property goes into your own capital cost allowance classes — CCA, the tax system’s version of depreciation — at that figure, whatever the seller had depreciated it down to. Inventory comes in at its allocated cost and deducts as you sell it. Goodwill enters a class of its own, Class 14.1, and grinds down at a rate well below most equipment classes.

Timing helps here. Bill C-15, law on March 26, 2026, reinstated the accelerated investment incentive and added immediate expensing for a short list of productivity assets, so the first year on newly acquired equipment is generally the big one. Both measures generally require an arm’s-length acquisition. One cap survives the step-up: a passenger vehicle in the deal sits in Class 10.1 with its capital cost capped at C$39,000 for a 2026 acquisition, C$38,000 for 2025, whatever the allocation says.

A share purchase gives you none of this. The price becomes the cost base of the shares, which does nothing until you sell them. Inside, the corporation carries on with the pools it already had. Equipment depreciated for eight years has almost nothing left in it, even though you have just paid market value for the business that owns it. That gap is the reason a share price and an asset price for the same business are not the same number.

The allocation is negotiated once and then lives for years

The purchase agreement splits the price across categories — inventory · equipment and fixtures · real property, land and building separately · goodwill · sometimes a restrictive covenant paying the seller not to compete, which has treatment of its own. Buyers want weight on the fast categories. Every dollar moved from goodwill to inventory or equipment is a dollar deducted in years rather than decades.

Sellers want the opposite, and for a concrete reason. Proceeds allocated to equipment come back to them as recapture — the recovery of depreciation already claimed, taxed in full — while goodwill the seller built rather than bought is generally a capital gain, half taxable. So the allocation is a real negotiation, not a schedule someone fills in after the handshake. It has to be reasonable and supported: the CRA can revisit it on either side, and both parties file consistently with what they signed.

A worked example: C$1,000,000 for a shop

Illustrative, round numbers, December 31 year-end, provincial tax left out.

You buy a service business for C$1,000,000 as an asset deal. The agreement allocates C$150,000 to inventory, C$350,000 to equipment and fixtures, and C$500,000 to goodwill.

The inventory is the fastest money back: it becomes cost of sales as it sells, mostly in the first year. The equipment enters your class at C$350,000 and is deducted over the following years at that class’s rate, with an enlarged first-year claim under the reinstated incentive. The goodwill sits at C$500,000 in Class 14.1 and comes back slowly. Half the price is buying a deduction stretched over decades; the other half works inside a business cycle.

Now shift C$100,000 from goodwill to equipment. Your first three years improve. The seller’s tax bill for the year of the sale gets worse by about the same money, because that C$100,000 moves out of half-taxable gain and into fully taxable recapture. Nothing about the business changed. That is why allocation is priced, not assumed.

Same C$1,000,000 as a share purchase instead: none of the above happens. You hold shares with a C$1,000,000 cost base, and the corporation’s equipment pool still shows the C$90,000 the seller had depreciated it to. The deductions you would have had on the asset version are gone, which is precisely what the lower share price is meant to compensate for.

What comes with the shares

A corporation is bought with its whole past attached. Diligence on a share deal is mostly tax and payroll archaeology:

• returns filed and assessed, and which years are still open to reassessment — the records that support them should come across with the company;
• source deductions and GST/HST actually remitted, not merely reported on a return;
• how workers are engaged, because a contractor roster that should have been payroll is an assessment waiting for whoever owns the corporation when it lands;
• the shareholder-loan account and anything the departing owner owes the company;
• what the tax pools actually hold — undepreciated capital cost, losses carried forward, the capital dividend account balance.

Buying control also resets the corporation’s tax year. An acquisition of control triggers a deemed year-end on the acquisition date: an extra T2 — the corporation’s income tax return — due six months after it, with CCA prorated for the short year. Losses carried into it are restricted: non-capital losses are generally usable afterwards only against income from the same or a similar business, so a target’s loss pools are worth less than the balance sheet suggests. Reps, warranties, indemnities and a holdback cover the rest; those are your lawyer’s instruments, not ours.

GST/HST: shares are quiet, assets are not

A sale of shares is generally an exempt supply, so no GST/HST applies to the share price. An asset purchase is the opposite — a sale of property, taxable supply by supply — and on a seven-figure deal the tax is a real cash number at closing even where you recover it as an input tax credit a quarter later.

There is a joint election that can relieve the tax on the transfer where the buyer acquires substantially all of the property needed to carry on the business, generally available only where both parties are registrants. It is filed, not assumed, and belongs in the agreement rather than in a conversation after closing. A separate election exists for accounts receivable moving with the business, and real property inside the deal runs on its own rules again. This is the part of a purchase most often found late, and the filing dates do not move for it.

Where the buyer and the seller actually meet

Sellers push for shares because the lifetime capital gains exemption applies to shares and not to assets, and because asset proceeds land inside their corporation with a second layer of tax ahead of them. Buyers push for assets because of the step-up and the clean history. Both positions are correct, which is why the gap gets settled with price rather than argument, and why hybrid structures exist — built with a lawyer and a tax adviser reading the same facts, not chosen from a menu.

One buyer-side question stays open after the structure is set: which entity signs. Personally, through your existing operating company, or through a new corporation — and whether a holding company belongs in the chain. Financing follows the answer. Interest on money borrowed to buy shares is generally deductible where the shares can produce income, but a deduction is only worth something in an entity with income to use it against, and a new corporation holding shares and nothing else often has none.

What Cadence does

We model the two versions on the actual numbers before the letter of intent is signed: what the allocation produces in deductions over five years, what the deemed year-end and the restricted losses do to the transaction year, and what share price would leave you level with the asset deal. Where the allocation is still open, we say which categories are worth conceding. We prepare the returns the transaction creates — the short-year T2, the first full year, the GST/HST filings and the elections that belong with them — and we work alongside your lawyer rather than in place of one.

What we do not do is assurance. A quality-of-earnings review or an audit of the seller’s statements is not our work — we are not a CPA firm — and where a deal needs one we say so and name someone who does it. Transaction modelling sits inside tax planning and advice and is included in the year-round packages; the extra returns a purchase creates are scoped at the estimate. For auto, repair and local service businesses, where most purchases are asset deals, the allocation conversation is the one worth having first.