Buying or selling a business in London, Ontario is equal parts numbers, negotiation, and nerve. The headline price grabs attention, but the after-tax result is what you actually live with. A well-structured deal can add six figures of value to either side without changing the sticker price. A poorly structured one can do the opposite. I have watched buyers pay an extra year of cash flow because they missed an HST election, and I have seen sellers keep an additional 20 percent of proceeds by preparing for the Lifetime Capital Gains Exemption a year earlier than they planned to sell.
This guide concentrates on taxes that matter when you buy a business in London or sell one anywhere in Ontario, with examples drawn from real files. The city has a healthy market of companies for sale, from trades and transportation to food service and healthcare. Whether you found an off market business for sale through your network, through Liquid Sunset Business Brokers or another business broker London Ontario firms use, the rules do not change. Your timing, structure, and paperwork determine how the CRA treats the deal.
The choice that drives everything: share sale or asset sale
Most small businesses in London operate through a corporation. You can either sell or buy the shares of that corporation, or you can sell or buy the assets used in the business, such as equipment, inventory, contracts, and the trade name. The choice carries different tax outcomes and practical risks.
Sellers usually prefer a share sale. When a seller disposes of qualified small business corporation shares, they may access the Lifetime Capital Gains Exemption. For 2024 the LCGE is a little over 1 million dollars per person for qualified small business corporation shares. The number is indexed annually and moves over time. If a spouse or adult child also owns valid shares, you can sometimes multiply the exemption across family members, provided you meet the conditions.
Buyers often prefer an asset sale. Buying assets gives you a fresh tax cost base for depreciable property and intangible assets. That can mean meaningful CCA deductions in the years after closing. It also helps ring fence pre-closing liabilities. You usually avoid buying historical tax exposures, litigation, and skeletons.
The trade is quite simple to state and hard to balance. Sellers give up LCGE in many asset deals. Buyers give up tax depreciation in many share deals. When people ask me why the same business is priced higher as shares, the LCGE is the usual answer. I have justified a 10 to 20 percent higher price on share deals where two owners could each shelter up to the exemption, translating into a six figure swing on closing.
Asset deals in detail: HST, price allocation, and CCA
Asset deals feel concrete, but they hide technical traps.
HST. Ontario’s HST rate is 13 percent. Asset sales are generally taxable for HST, even for goodwill and intangible assets. There is a common exception when you purchase all or substantially all of a business as a going concern and both parties are HST registrants. If both sides file the election to treat the sale of https://blog-liquidsunset-ca.iamarrows.com/sunset-business-brokers-negotiating-non-compete-and-retention-agreements a business as a going concern, section 167 of the Excise Tax Act lets you avoid collecting HST at closing. The buyer may self assess in some real property situations. I still see deals where parties forget the election and 13 percent gets added to the purchase price. That is a nasty surprise when financing was set to the penny.
Purchase price allocation. In an asset deal the buyer and seller must allocate the purchase price across categories such as inventory, equipment, vehicles, leaseholds, software, customer lists, and goodwill. The CRA expects the allocation to be reasonable and consistent between parties. A practical example from a London HVAC company sale at 1.2 million dollars:
- Inventory at landed cost: 150,000 Vehicles and equipment, Class 10 and 8: 350,000 Leaseholds and software, Class 13 and 12: 50,000 Goodwill and customer relationships, Class 14.1: 650,000
This split let the buyer claim capital cost allowance on equipment and Class 14.1 over time, with the half year rule in the first year. The seller triggered recapture on depreciable assets where tax value was low, and a capital gain on the goodwill. If that seller had done a share deal with LCGE available, the net tax would have been lower, but the buyer’s future deductions would have been smaller. We ended up with a modest price adjustment to share the tax difference.
Land transfer tax. If real property is part of an asset deal, Ontario land transfer tax applies. London does not add a municipal land transfer tax, unlike Toronto. Budget for it and remember that HST often applies to commercial real estate unless the buyer is registered and elects to self assess. The interplay is technical, but a good solicitor in London handles these filings regularly.
Contracts and payroll. In an asset purchase, employees do not automatically transfer. If they are rehired by the buyer with no break in service, certain employment standards carry over. For tax, accrued vacation and bonuses are sensitive. Plan who pays what and who deducts what. Simple language such as seller pays accrued but unpaid vacation to closing, buyer assumes future entitlements, can avoid a year-end phone call to your accountant.
Share deals in detail: LCGE, HST relief, and acquisition of control rules
Share sales are often cleaner for operations. Customers and employees notice less change, and many contracts stay in place. From a tax lens:
LCGE. If the corporation’s shares qualify as qualified small business corporation shares, individual sellers may claim the LCGE. The rules test active business status in Canada, length of ownership, and asset composition in the 24 months before closing. I have helped owners clean up their balance sheet a year ahead of a sale by moving out passive investments and excess cash, or by bumping up active assets, to meet the asset tests. You cannot fix this in the week before closing. If you are thinking of selling a business in London Ontario next year, now is the right time to check the QSBC tests.
HST. Share sales are generally exempt from HST because they are considered financial services. That alone sometimes simplifies closing. I still verify whether any side agreements, such as a separate sale of equipment or a consulting contract, should have HST.
Acquisition of control. When a buyer acquires control of a corporation, Canadian tax law deems a year end and restricts how non capital losses and certain tax pools can be used after closing. If you buy shares of a company that shows large loss carryforwards, be careful. You may not be able to use those losses unless you carry on the same or similar business. It is one of the reasons a share purchase price should not value losses at 100 cents on the dollar.
Tax attributes matter. I once bought a dental lab where the seller’s corporation had a healthy capital dividend account from past gains. We timed a capital dividend before closing so the seller could extract cash tax free, and reduced the share price by the same amount. Both parties won. Buyers should ask for a schedule of CDA, RDTOH, GRIP, and safe income. Sellers should consider paying out or crystallizing these attributes before the acquisition of control closes those doors.
Working capital targets and true ups
In London’s small deals, working capital often rides under the radar. It should not. If you buy a business and the accounts receivable are 200,000 dollars, the payables are 160,000 dollars, and inventory sits at 150,000 dollars, leaving out a working capital target can shift value by tens of thousands.
I like to define a normalized working capital peg based on the last twelve months and then true up post closing. If the buyer inherits more working capital than the peg, the buyer pays more. If the buyer gets less, the seller pays back. The tax treatment aligns with the main deal. In an asset sale, the working capital items are part of the assets bought. In a share sale, they simply sit inside the corporation. Always reconcile the tax treatment of holdbacks and true ups. If a holdback is released next year, the seller may need a capital gains reserve or an income pickup, and the buyer needs to know which expense or asset gets adjusted.
Earnouts and vendor take back notes
Not every business for sale in London has stable earnings. A buyer might not want to pay for projected growth until it shows up. Earnouts solve that. The tax rules for earnouts differ for shares and assets, and the paper needs to be right.
In general, the CRA allows a vendor to claim a reserve for a portion of capital gains if proceeds are receivable after the year of sale. The reserve can stretch for up to five years. Done properly, that spreads the seller’s tax over time, matching cash receipts. With shares, there is also a cost recovery method for contingent earnouts in specific circumstances. Get advice on wording. I have seen an earnout drafted with operational targets so vague that both sides spent more on lawyers than the earnout paid.
Vendor take back financing is common in the mid market in London. A seller might hold a note for 10 to 40 percent of the price. Interest is taxable to the seller and deductible for the buyer. If the buyer is a non resident or uses foreign debt, thin capitalization and interest limitation rules can cap deductions. If you are buying a business in London with financing from an overseas parent, talk to a tax advisor before you sign the term sheet.
Restrictive covenants and consulting agreements
Non compete and non solicit agreements protect the buyer’s goodwill. The tax treatment is not intuitive. Payments specifically for a restrictive covenant are generally fully taxable as ordinary income to the recipient under section 56.4. There is a joint election available in certain share sales with arm’s length buyers that can roll the payment into goodwill, making it eligible for capital gains treatment for the seller and amortization for the buyer as Class 14.1. Many people miss the election and leave money on the table.
Consulting agreements are services and usually attract HST. If the seller will consult for 12 months post closing at 5,000 dollars a month, budget 13 percent HST and the corresponding input tax credit for the buyer, assuming registrant status. The CRA likes to see a fair hourly or monthly rate and defined deliverables. If the consulting fee is simply deferred purchase price dressed up, you invite scrutiny.
Payroll, source deductions, and CRA comfort letters
One item that turns up in diligence more often than people expect is payroll liabilities. The CRA takes source deductions seriously. In an asset purchase, get comfort that the seller is current on remittances. In a share purchase, consider a holdback until you receive a tax clearance or comfort letter. If a seller falls behind on payroll withholdings, directors can be personally liable. I saw a deal in East London where a director thought he had resigned years prior. The CRA assessed him because the resignation paperwork never got filed. We settled it, but it delayed closing by two months.
HST compliance checks for buyers
HST registration, filing frequency, and elections tell you a lot about how a business is run. If you are buying a business in London Ontario that sells to consumers, test the mechanics. Ring in three items, verify the HST rate, match deposits to reported returns. For B2B service firms, check that input tax credits tie back to vendor invoices with proper names and GST numbers. It is not glamorous, but I have used this drill to find unrecorded revenue and to support a 100,000 dollar working capital adjustment.
Scenario walk through: a café on Richmond Row
We sold a café near Richmond Row for 420,000 dollars. The buyer originally wanted shares to avoid HST on the deal and keep the name, staff, and permits intact. The seller had two shareholders and both qualified for the LCGE. Their accountant estimated almost no tax on a share sale. The buyer’s accountant ran the numbers on an asset purchase and calculated about 40,000 dollars in incremental CCA deductions over the first three years due to the step up in equipment and leaseholds.
We solved this with a hybrid: a share sale at a slightly lower price, plus a small consulting contract for the seller at market rates to cover transition. The HST on consulting was easy to handle with input credits for the buyer. We papered the restrictive covenant election to treat the non compete as goodwill. The sellers claimed LCGE, the buyer kept the brand, and we avoided an HST cash squeeze at closing.
Scenario walk through: a trades company in south London
Another file involved a trades company with 16 employees, vehicles, and a steady commercial client base. Asking price was 1.6 million dollars. The buyer found the opportunity through a local network often described as off market business for sale, with a quiet introduction from a supplier rather than a public listing of businesses for sale London Ontario observers might see online.
The buyers insisted on an asset deal due to perceived risk. The seller’s corporation held a small rental property on the side, which would have blown the QSBC asset tests for LCGE anyway. We did the following:
- Section 167 election to treat the sale as a going concern. No HST collected at closing. Purchase price allocation that tilted a bit more into goodwill for the seller, offset by a lower equipment number that matched tax values and reduced recapture. Working capital peg based on an average of the last six months, because seasonality distorted a twelve month lookback. A three year non solicit and a reasonable non compete with an election to attach value to goodwill, not a separate restrictive covenant payment.
The seller’s after-tax proceeds were about 1.28 million dollars. If we had jammed everything into equipment, the seller’s recapture would have crushed their tax bill by an extra 90,000 dollars. Precision in the allocation saved them more than any haggling over new tires on a van.
The capital gains inclusion rate conversation
For years, individuals in Canada paid tax on 50 percent of capital gains. Federal proposals have increased the inclusion rate for certain gains above a threshold and for corporations and trusts. The details and dates have shifted with legislation. When you model a sale, ask your advisor to confirm the current inclusion rate and whether the LCGE or other relief applies. I have now seen multiple sellers accelerate a closing date by a few weeks to stay under a planned change. It matters.
Non resident buyers and sellers in the London market
You do not have to be a local to buy a business in London. I routinely meet buyers from the GTA and the U.S. Looking for companies for sale London owners are ready to transition. Non residents face extra tax friction.
A non resident seller of shares may need a section 116 certificate and the buyer may need to hold back a portion of the price for withholding tax until the certificate arrives. In an asset sale with real property, similar withholding issues arise. Plan this at the letter of intent stage. I have had files where a missing clearance held up payment for months.
For non resident buyers, withholding on interest to a non resident lender, thin capitalization rules, and transfer pricing can show up, even in small deals. If you are financing the purchase from a related foreign company, that is a bright flag for the CRA. Use Canadian debt where you can or set up a straightforward arm’s length loan with evidence.
Practical tax hygiene for London deals
When I look at small business for sale London Ontario listings, the ones that close smoothly share a few habits. Financial statements match tax filings. HST accounts are clean. Payroll reconciles. Legal minute books are complete.
Here is a compact buyer checklist, focused only on tax and designed to avoid the most expensive mistakes:
- Decide early whether you want shares or assets and model both, including LCGE value to the seller and CCA value to you. Confirm HST status and, for asset deals, pre agree on a section 167 election for going concern if eligible. Set a clear working capital target and define what is included and excluded, with a 60 to 90 day true up after closing. Test payroll, HST, and corporate tax filings against bank statements and invoices, not just management reports. Identify restrictive covenant, consulting, or training payments and their HST and income tax character.
For sellers, early prep makes the biggest difference. I like to start a year before listing whenever possible. Here is a short seller prep list that reliably puts more money in your pocket:
- Test your shares for LCGE eligibility and clean up passive assets or excess cash well before marketing the business. Resolve payroll or HST arrears, file late returns, and document director resignations so acquisition of control does not trigger surprises. Map an asset or share deal fallback, including a target purchase price allocation and a share price that recognizes LCGE. Organize minute books, shareholder registers, and tax attributes such as CDA, RDTOH, and GRIP, and plan capital dividends where appropriate. Pre negotiate how non compete and consulting payments will be treated, and line up the section 56.4 election if a share sale is likely.
Brokers, off market opportunities, and local know how
Brokers can be helpful traffic directors. A good business broker London Ontario sellers trust will coordinate accountants, lawyers, and lenders, and will push both sides to make timely tax elections. I have worked with sunset business brokers and other local firms that know when a landlord in Old East Village wants extra security, or when a local franchisor needs a personal guarantee. If you prefer the quiet route and pursue an off market business for sale, build tax structure into your first draft of the letter of intent. That is when you can still trade LCGE for price, or HST for terms, without emotion.
I also see buyers search online for business for sale in London or companies for sale London and then try to take a national template and force it on Ontario rules. Do not. The HST going concern rules, Ontario land transfer tax, and provincial employment standards all shape the right structure. Local practitioners have closed dozens of businesses for sale in London Ontario and have muscle memory for the paperwork that saves time and penalties.
Special notes on franchises, professionals, and regulated businesses
Franchises often require franchisor approval before you buy a business in London. Many franchisors prefer share deals to keep the license intact, or asset deals to reset royalties and equipment leases. Franchise fees and transfer fees may attract HST. If you are paying a lump sum that includes equipment, inventory, and the franchise transfer, lay out the allocation clearly to avoid double tax.
Professional corporations, such as dental or medical, have their own limits. Only members of the profession can own the shares directly, although family trusts and holding companies appear around the edges. Share sales dominate in these transactions. LCGE planning becomes central, and earnouts get tricky because some regulators dislike heavy performance-based payments tied to patient files. In London’s healthcare corridor, plan for longer closings and for extra compliance.
Tax sensitive wording to get right in the purchase agreement
The purchase agreement does not need to read like a tax treatise, but a few clauses deserve care:
- Tax elections. Call out the section 167 election for HST going concerns in asset deals, and the section 56.4 election for restrictive covenants in share deals where you want capital treatment. Allocation schedule. Attach a binding purchase price allocation or a method to finalize one within 60 days after closing. Avoid a free for all later. Reserves and earnouts. Spell out how earnouts are computed, when they are paid, and how they are taxed. If you expect a capital gains reserve, say so. Indemnities for pre closing taxes. Make clear who bears pre closing HST, payroll, and corporate taxes, and what evidence will satisfy the buyer to release holdbacks.
I have fixed more deals in the 48 hours before closing than I care to admit, mostly because these items were glossed over in the LOI and then became emotional when lawyers tried to memorialize them. If you align on tax structure early, everything else moves faster.
Timing and year end planning
Closing two weeks before a seller’s corporate year end or two weeks after can change taxes. Depreciation claims, bonus accruals, and small business deduction access can shift with the date. Share deals often trigger a deemed year end on acquisition of control. Coordinate with your accountant on bonus payouts to reduce active business income, dividends to clear RDTOH and CDA, and final payroll remittances. For buyers, closing just after a reporting period sometimes makes the HST return cleaner. It is less romantic than choosing an auspicious date, but it is more profitable.
When the price is the price, use structure to fix the net
Sometimes the room has no appetite to move the headline price. If you hit that wall, I reach for second order levers:
- Seller rolls a small percentage of equity to access LCGE later, while the buyer gets a partial step up on assets now. Buyer agrees to a shorter non compete but a broader non solicit, and the parties file the election to treat it as goodwill rather than ordinary income. Working capital peg is calculated over a shorter period to reflect recent seasonality where the seller invested in inventory ahead of a new contract. Vendor take back interest rate is nudged within market to shape the timing of deductions and income.
These are quiet changes, but they move real dollars. I once saved a seller of a small manufacturing shop outside London 65,000 dollars of tax with nothing but a one page schedule that reworded the restrictive covenant and extended the earnout by a year.
Pulling it together
Tax rarely wins or loses a deal on its own, yet it touches every term that matters. The London market is active, with buyers who want to buy a business in London Ontario for growth, and owners who want to sell a business London Ontario residents built over decades. If you are scanning small business for sale London listings, or if you have a buyer in hand, take a day to model the tax on two or three structures and to draft the necessary elections. Line up your accountant, your lawyer, and if you are using one, a broker such as Liquid Sunset Business Brokers or other business brokers London Ontario entrepreneurs recommend. Tight paperwork now beats a panicked call to the CRA later.
The prize is straightforward. Sellers aim to keep more of what they have earned, ideally by using the LCGE on a clean share sale. Buyers aim to own a business with a strong tax base for future deductions and without inheriting old liabilities. Those outcomes are not at odds. With a little local knowledge and a willingness to trade structure for value, both sides can leave the table satisfied.