Taxes when you sell a small business in Canada: the basics

Tax is often the biggest cost of selling a business, and the rules are detailed. This page explains the main ideas in plain words so you can have a better conversation with your accountant.

Capital gains, in plain words

If you sell something for more than it cost you, the difference is usually a capital gain. For individuals, one half of a capital gain is generally added to your income for the year and taxed at your normal rate. Some parts of a business sale, such as inventory, or equipment that has been depreciated for tax, can be taxed differently. Your accountant can sort out which is which.

The lifetime capital gains exemption

Canada has a lifetime capital gains exemption for owners who sell shares of a qualifying small business corporation. The CRA lists the limit as $1,275,000 of capital gains for 2026. In simple terms, a qualifying owner may not pay tax on that much of the gain. The CRA also uses the same limit for qualified farm and fishing property.

There are several conditions. Roughly speaking, the company must be a Canadian-controlled private corporation, nearly all of its assets must be used in an active business in Canada when you sell, and there are further tests covering the 24 months before the sale. Spare cash or investments sitting in the company can cause problems. That's why accountants like to plan ahead.

Share sale or asset sale?

If your business is incorporated, a buyer can buy your shares or buy the business assets from the company. The exemption above generally applies only to a share sale. Buyers often prefer to buy assets. This is one of the biggest decisions in a sale. Our guide on asset sale vs share sale explains the difference.

Getting paid over time

If part of the price is paid to you in later years, for example through vendor take-back financing, the CRA's reserve rules can sometimes let you spread the capital gain over a number of years. Ask your accountant whether that fits your sale.

Sales taxes

GST, and PST in British Columbia, can also come up when a business is sold. That is covered in GST and PST when selling a business.

Questions to take to your accountant

• Would my shares qualify for the lifetime capital gains exemption? If not, what would it take?
• Should I sell shares or assets, and how would each be taxed?
• How would paying part of the price over time affect my tax?
• Is there anything I should change in the company in the next two years?
• Roughly how much will I keep after tax and fees?

Planning to pass the business to family? Read passing your business to family, where the rules are different again.