Selling a sole proprietorship in Canada

Many small businesses in Canada are sole proprietorships: one owner, no company, and income reported on a personal tax return. Selling one is simpler in some ways than selling a company, but it works differently. There are no shares to hand over, so you sell the pieces of the business instead. Here is what that means for the sale, the paperwork and your tax.

The short answer

The CRA describes a sole proprietorship as an unincorporated business owned by one person, with no separate legal status from the owner. You own the business assets yourself, so a buyer cannot buy shares. Every sale of a sole proprietorship is an asset sale: the buyer buys the things the business uses and earns from, then carries on the business in their own name or their own company.

That has three big effects:

• you keep any debts and contracts you do not sell or transfer, so you deal with them yourself,
• the buyer starts fresh with their own registration, tax accounts and payroll,
• the lifetime capital gains exemption is generally not available, because it is built around shares.

What you actually sell

Your purchase agreement lists what is included. For most sole proprietorships that means some or all of:

• Equipment, tools, vehicles and furniture, with a list and agreed values.
• Inventory, usually counted on closing day. See selling a business with inventory.
• Goodwill, the value of a working business with customers and a reputation. See goodwill when selling.
• The trade name and brand, such as the logo and signs.
• The customer list and records, handled with care for privacy.
• The phone number, website, domain, email and social accounts, moved to the buyer through each provider.
• Contracts, the lease and any licences that can be moved over, which usually needs someone else's consent.

Write down anything you are keeping, such as cash, accounts receivable, a personal vehicle or a tool you use at home. Clear lists avoid arguments on closing day.

Your business name registration

If you trade under a name other than your own, you probably registered it with your province. The registration belongs to you, not to the buyer. In British Columbia, BC Registries says that if you sell your business you must dissolve your proprietorship, and the new owner must register a new entity. BC also notes that registering a name does not give it legal protection, so the buyer should check the name and register it themselves before closing.

Other provinces run their own registries, so check the rules where you operate. Business licences are issued by your city or municipality, so ask them what the buyer needs.

Tax accounts with the CRA

The CRA asks sellers to contact their tax services office when a sole proprietorship changes owner. When you sell, you may need to cancel your business number, close your payroll account if you have employees, and close your GST/HST account. The buyer may need a new business number and their own accounts. Plan these steps for the days around closing so nothing is left open by mistake.

Income tax on the sale

A sole proprietor reports business income on a personal T1 return, using Form T2125, Statement of Business or Professional Activities. The year you sell, your accountant will report the sale in pieces, because each kind of asset is treated differently:

• Goodwill and other capital property. A gain is generally a capital gain. For individuals, one half of a capital gain is generally included in income. Since January 1, 2017 the CRA puts goodwill in capital cost allowance class 14.1.
• Equipment you have depreciated. If you sell it for more than the undepreciated capital cost of its class, the CRA treats the difference as recapture of capital cost allowance, which goes back into business income. If you sell it for more than its original cost, there is also a capital gain on the amount above cost. If you sell it for less than its tax value and no property is left in the class, you may have a terminal loss you can deduct.
• Inventory. Generally ordinary business income, like any other sale of stock.

This is why the split of the price matters. The CRA says the buyer should use the prices in the agreement if they are reasonable, and the amounts should match on both sides. Agree a fair split, written into the agreement, before closing. Our guide to taxes when selling a business explains capital gains in more detail.

The lifetime capital gains exemption

The CRA allows the capital gains deduction on gains from qualified small business corporation shares and from qualified farm or fishing property. An ordinary sole proprietorship has no shares, so the exemption is generally not available when you sell its assets. Some owners ask whether they should incorporate first and later sell shares. The share tests look back 24 months and the move itself has tax steps, so this is a question for your accountant well before you list. See how the exemption works.

GST/HST and the section 167 election

If you are registered for GST/HST, taxable assets you sell can attract GST/HST. The CRA explains that you and the buyer may be able to jointly elect to have no GST/HST payable on the sale, under section 167 of the Excise Tax Act, using Form GST44, when:

• you are selling a business you established or carried on, not just a few assets,
• the buyer gets ownership, possession or use of at least 90% of the property needed to carry on the business,
• the buyer can carry on the same kind of business with what they get,
• if you are a registrant, the buyer is a registrant too.

The buyer files the election with the CRA by the due date of the return in which tax would otherwise have been payable. The election does not cover everything: GST/HST can still apply to services you provide to the buyer and to property supplied by lease or licence. Provincial sales tax, such as PST in British Columbia, has its own rules. See GST and PST when selling a business.

Leases, contracts and licences

Because the buyer is a new owner, most agreements in your name do not move over by themselves. Your landlord usually has to consent to assigning the lease, and suppliers, equipment lessors and service providers may need to agree too. Some permits and licences cannot be transferred, so the buyer applies for their own. Start these conversations early, with the buyer's lawyer and yours. Our guides to the commercial lease and to transferring contracts and licences have checklists.

Debts stay with you unless the agreement says otherwise. As a sole proprietor you are personally responsible for them, so plan to pay off loans and liens from the sale proceeds. See selling a business with debt.

Employees

If you have staff, the buyer will usually decide who to offer jobs to. Employment law is provincial. In British Columbia, section 97 of the Employment Standards Act says that if all or part of a business is disposed of, an employee's employment is deemed continuous for the purposes of the Act. That can affect vacation and length of service for staff who stay on. Ask your lawyer what you owe on closing, including wages and vacation pay, and close your payroll account with the CRA. Our guide on what to tell employees covers timing and wording.

A simple worked example

These numbers are made up and rounded for illustration only. Your own deal and tax will differ.

Questions to take to your accountant and lawyer

• How will each part of my sale be taxed: goodwill, equipment and inventory?
• How much recapture could I have on my equipment and vehicles?
• Is it worth incorporating before I sell, and how long would that take to help?
• Can we use the section 167 election for GST/HST, and who files it?
• What do I need to close with the CRA: business number, payroll and GST/HST?
• How do I dissolve my name registration, and when?
• Which contracts, the lease and licences need consent to move over?
• What do I owe my employees on closing, and who will the buyer hire?

For more, read what your lawyer and accountant do. Running a bookkeeping or tax practice on your own? See selling a bookkeeping or accounting practice in Canada. This guide is general information, not legal or tax advice for your situation. Questions about listing with us go to hello@sellmybusinessdirect.com.