Selling a Property Held by a Corporation in Quebec: Share Sale or Asset Sale

When a plex or rental building belongs to a corporation, the question is not only what price to sell at, but what to sell: the building, or the corporation that owns it. Both sales lead to the same apparent change of hands, but they do not split tax or risk the same way. This article covers that one choice. It does not revisit whether to hold property through a corporation or the inclusion rules on the gain, which are covered in our article on tax optimization when selling a plex.

Two different sales for the same building

In an asset sale, the corporation is the seller: it transfers the building to the buyer and collects the price. The corporation carries on, still owned by the same shareholders, and it is then up to them to take the funds out.

In a share sale, the shareholder is the seller: they transfer their shares, and control of the corporation with them. The building doesn't move; it stays owned by the same corporation. What changes hands is the whole corporation, with everything inside it: the building, but also its debts, contracts, tax history and any disputes.

That difference in nature explains everything else. In the first case you sell an asset. In the second, you sell a business that owns an asset.

Asset sale: tax is paid inside the corporation, then on the way out

When the corporation sells the building, it realizes a capital gain if the price exceeds its cost. If it claimed depreciation on the building while holding it, the sale also triggers recapture of that depreciation, taxed as income. Both are paid inside the corporation, in the year of the sale.

The money then has to come out of the corporation to the shareholder, usually as dividends, which are taxed in the shareholder's hands. The non-taxable portion of the capital gain can, however, be paid out tax-free through the capital dividend account. The result is tax in two stages, which the tax system tries to make roughly equivalent to personal ownership, without always matching it exactly.

Share sale: the buyer inherits everything the corporation carries

When the shareholder sells their shares, only they realize a capital gain, equal to the difference between the share price and what the shares cost them. The corporation itself sells nothing: the building keeps its original tax cost, and depreciation already claimed stays claimed.

That is exactly what worries the buyer. By taking over the corporation, they take on the building with a tax cost often well below the price they are paying, and therefore with latent tax that wakes up the day the corporation sells in turn. They also take on all of the corporation's obligations, known or not: a forgotten debt, a notice of assessment, a dispute with a tenant. Hence due diligence heavier than for buying a building, and the warranty and indemnity clauses the buyer asks of the seller.

Why buyers and sellers want different sales

The interests cross almost perfectly. Sellers often prefer to sell shares: one layer of tax, no recapture inside the corporation, and a simpler exit. Buyers often prefer to buy the building: a fresh tax cost equal to the price paid, which they can depreciate, and no past to carry.

What is really being negotiated is who carries the latent tax. A buyer who agrees to buy shares takes that tax on for the future, and generally reflects it in the price offered. A seller who agrees to an asset sale pays that tax themselves, through their corporation. The form of the sale is therefore part of the negotiation, just like the price.

Transfer duties and financing: two effects that get overlooked

Transfer duties apply to the transfer of a property. In an asset sale, the building changes owner and the buyer pays them. In a share sale, the building stays owned by the same corporation: in principle there is no transfer of the property, and so no transfer duties. That difference weighs in the comparison, but it should never be taken for granted without a notary's view on the specific file.

Financing changes too. In an asset sale, the corporation's mortgage is usually paid off at closing and the buyer arranges their own. In a share sale, the corporation's mortgage stays in place, but most loan agreements require the lender to be informed of, or to consent to, a change of control. The corporation's lender therefore becomes a party to the transaction, to be consulted early.

The capital gains exemption rarely rescues a share sale

An argument often made for the share sale is the capital gains exemption on small business shares. It exists, but it targets shares of corporations that carry on an active business. A corporation whose assets are mostly rental properties is generally treated as earning income from property, and its shares then do not qualify.

There are exceptions, depending on what the corporation actually does, and a tax professional can check whether yours is one. But a seller who builds the decision on that exemption without having it checked is taking a risk they will discover too late.

What to gather before choosing

The decision rests on figures the corporation already holds: the building's tax cost, the depreciation claimed since purchase, the shareholder's cost for the shares, outstanding debts and contracts, and the leases. Without them, the two sales cannot be compared on a real basis.

Gather these with your accountant, then have a tax professional run both options before the building goes on the market. The form of the sale is better decided before the first offer than in the middle of a negotiation, and it should be stated clearly to buyers, since it changes what they are buying.