Selling a Cross-Border Business: Tax on the Sale When Owner and Company Span Canada and the US

Selling a business that spans the Canada-US border produces tax consequences in both countries, and the structure of the sale determines who owes what. A Canadian resident selling shares of a US corporation owes Canadian tax on the capital gain (Canada taxes residents on worldwide income) and may owe US tax depending on whether the shares derive their value from US real property. A US resident selling shares of a Canadian corporation owes US tax and may owe Canadian tax under the same analysis. An asset sale adds another layer: each asset is sourced separately, and the buyer’s allocation of the purchase price between goodwill, equipment, inventory, and real property changes the tax result in both countries.

How is a share sale taxed: Canadian seller, US company?

A Canadian resident who sells shares of a US corporation reports the capital gain on their Canadian return. Canada taxes the gain at the capital gains inclusion rate (50% of the gain is included in income).

Under the treaty, the US generally cannot tax this gain. Article XIII(5) provides that gains from the alienation of any property, other than property referred to in paragraphs 1 through 4, are taxable only in the state of which the alienator is a resident. Shares of a US corporation are “any property” unless they fall into one of the exceptions.

The exception that matters: Article XIII(3)(b) allows the US to tax gains on shares if, at any time during the 12 months preceding the sale, the shares derived more than 50% of their value from real property situated in the United States. If the US corporation owns significant US real estate (a hotel, a factory, commercial buildings), the shares may be treated as US real property interests under FIRPTA, and the US can tax the gain even though the seller is a Canadian resident.

If the US cannot tax the gain (no real property exception), the Canadian tax is the only tax, and no Form 8833 or US return is needed for the share sale itself. If the US can tax it, the seller files Form 1040-NR, pays US tax on the gain, and claims a foreign tax credit in Canada for the US tax paid.

How is a share sale taxed: US seller, Canadian company?

A US resident who sells shares of a Canadian corporation reports the gain on their US return. The US taxes the gain at long-term capital gains rates (0%, 15%, or 20% depending on income, plus 3.8% net investment income tax if applicable) for shares held longer than one year.

Canada’s right to tax this gain follows the same treaty analysis in reverse. Article XIII(5) generally prevents Canada from taxing the gain because the seller is a US resident. The real property exception under Article XIII(3)(b) applies if the Canadian corporation’s shares derived more than 50% of their value from Canadian real property in the 12 months before the sale.

If Canada cannot tax the gain, the US tax is the only tax. If Canada can tax it (real property exception), the seller files a Canadian return, pays Canadian tax, and claims a foreign tax credit on their US return for the Canadian tax paid. The Canadian tax on the gain may be collected through withholding under ITA 116 if the shares are “taxable Canadian property” (TCP), which they are if the real property exception applies.

An additional consideration for US sellers of Canadian private company shares: if the corporation is a “qualified small business corporation” (QSBC) under ITA 110.6, a Canadian resident seller can claim the lifetime capital gains exemption (currently $1,016,836 for 2024). A US resident seller does not qualify for this exemption because it requires Canadian residency. This is one of the structural disadvantages of being a US resident selling a Canadian business.

How does an asset sale differ?

In an asset sale, the company sells its individual assets (equipment, inventory, receivables, real property, goodwill, customer lists, covenants not to compete) rather than the shareholders selling their shares. Each asset is sourced and taxed independently.

The buyer and seller must agree on the allocation of the purchase price among the assets, and both must report the same allocation on Form 8594 (Asset Acquisition Statement) in the US and the equivalent disclosure in Canada.

The tax treatment by asset category:

• Real property: gains on US real property are taxable in the US regardless of the seller’s residence (FIRPTA). Gains on Canadian real property are taxable in Canada. The treaty confirms this under Article XIII(1).
• Depreciable business property: gains on depreciable assets (equipment, vehicles, leasehold improvements) are partly ordinary income (to the extent of depreciation recapture under IRC 1245 or IRC 1250 in the US, and CCA recapture in Canada) and partly capital gain. The recapture portion is taxed at ordinary rates.
• Inventory: gains on inventory are ordinary income, taxed in the country where the business operates.
• Goodwill: the sourcing of goodwill depends on where the business operates. US goodwill of a US business is US-source. Canadian goodwill of a Canadian business is Canadian-source. For a business operating in both countries, the goodwill must be apportioned.
• Covenants not to compete: treated as ordinary income to the seller in the US (amortizable under IRC 197 for the buyer). In Canada, treated as an eligible capital expenditure (now depreciable property under Class 14.1). The sourcing follows the geographic scope of the covenant.

What is the lifetime capital gains exemption, who gets it?

Canadian residents selling shares of a qualified small business corporation (QSBC) can claim the lifetime capital gains exemption (LCGE) under ITA 110.6. For 2024, the exemption shelters up to $1,016,836 of capital gains on QSBC shares from tax. The corporation must meet three conditions: it must be a Canadian-controlled private corporation (CCPC), more than 90% of its assets must be used in an active business carried on primarily in Canada at the time of sale, and the shares must have been held for at least 24 months.

A US resident selling shares of the same Canadian corporation does not qualify for the LCGE because ITA 110.6 requires the individual to be resident in Canada throughout the year. A US citizen who is also a Canadian resident can claim the LCGE on the Canadian return but must report the full gain on the US return with no corresponding US exclusion (there is no US equivalent of the LCGE for operating business shares, though IRC 1202 provides a qualified small business stock exclusion for US C-Corp shares).

The LCGE does not apply to sales of assets (it applies to shares only), which is another structural reason to prefer a share sale when the seller is a Canadian resident.

How do you prevent double taxation?

The treaty’s mechanism is the foreign tax credit. When both countries have the right to tax the same gain (the real property exception, or an asset sale with gains sourced to both countries), the seller’s country of residence allows a credit for tax paid to the other country.

For a Canadian resident: claim the foreign tax credit on the Canadian return under ITA 126 for US tax paid on gains that the US is entitled to tax under the treaty.

For a US resident: claim the foreign tax credit on Form 1116 for Canadian tax paid on gains that Canada is entitled to tax under the treaty.

The credit does not always offset fully. Differences in tax rates, inclusion rates, and characterization (capital gain vs ordinary income) can leave residual tax. The most common mismatch: Canada treats a gain as a capital gain at a 50% inclusion rate, while the US treats the same payment as ordinary income (depreciation recapture, covenant not to compete). The foreign tax credit is limited to the US tax on the foreign-source income, and if the US tax rate on that income is lower than the Canadian rate, the excess Canadian tax produces a credit carryover rather than an immediate offset.

Planning ahead, ideally years before the sale, is the only way to manage these mismatches. The choice of share sale vs asset sale, the allocation of purchase price, the timing relative to residency changes, and the use of installment payments all affect the final tax bill in both countries.

Related guides

• US-Canada Tax Treaty Explained
• Selling a Canadian Business Before or After Moving to the US
• Cross-Border Estate Planning: Freezes, Alter Ego, and Bypass Trusts
• Foreign Tax Credit Limitation and Carryover
• Cross-Border Dividend Tax: Canada and the US
• Winding Up a Canadian Corporation Before Moving to the US
• Leaving Canada Permanently: Tax Checklist

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.