You have found the business, negotiated the price, and obtained a preliminary agreement from the bank. One question remains that is often settled too quickly: who, exactly, is buying the shares? You, personally, or a company you create for the occasion?

The answer is more than a formality. It determines how much profit the company will need to generate to repay the acquisition debt, whether interest will be tax-deductible, how you might one day resell, and what the administration of the structure will cost. For a mid-sized acquisition, the difference can exceed one million dollars in pre-tax profit.

This guide is aimed at buyers acquiring the shares of an SME in Quebec, and at vendors who want to understand the structure their buyer will propose. It focuses primarily on share purchases; asset purchases are covered later.

Summary answer: when the purchase is financed largely by debt, buying shares through a holding company is generally more advantageous. The purchased company can pay dividends to the holding company, usually tax-free, to repay the debt with funds taxed only at the corporate rate. If purchased personally, every dollar of repayment must first be taxed in your hands. A personal purchase may be suitable for a small transaction paid in cash or a short-term resale. In all cases, validate the structure with a CPA before signing the letter of intent.

The two structures in brief

Personal purchase

You buy the shares of the operating company (which we will call "the purchased company") in your own name. You borrow personally and repay the loan with your salary or with the dividends the purchased company pays you.

Purchase via a holding company

You incorporate a new company (the holding company, also known as a "holdco"). You own its shares. It is the entity that borrows and buys the shares of the purchased company. The purchased company becomes a subsidiary of your holding company.

Step 1: Calculate the true cost of debt repayment

This is the deciding factor in most cases. The principal of a loan is not tax-deductible: it is repaid with after-tax money. The question, therefore, is how many times that money will be taxed before reaching the lender.

Via a holding company: one tax layer

The purchased company pays tax on its profits. It then pays a dividend to the holding company. Between related companies (where the holding company owns more than 10% of the votes and value), this dividend is generally received tax-free due to the intercorporate dividend deduction. The holding company then repays the lender.

Personally: two tax layers

The purchased company pays its tax, then pays you a dividend. You pay personal income tax on that dividend, then repay the lender with what remains. A salary does not solve the problem: it is deductible for the company, but taxed in your hands at your marginal rate.

Calculated example: a food distribution company in Drummondville

A buyer purchases the shares of a distribution company for $1,600,000. She invests $400,000 and finances $1,200,000 through a bank loan and a vendor take-back note, to be repaid in 6 years, i.e., $200,000 in principal per year (excluding interest).

Assumptions: the purchased company is taxed at the combined small business rate of 12.2% on its first $500,000 of eligible business income. Dividends paid are ordinary (non-eligible) dividends, taxed at the maximum marginal rate of 48.70% in 2026.

If purchased personally, the business must generate approximately $1.3 million more in pre-tax profit over six years to repay the same debt. Even at a lower marginal rate, the gap remains over $900,000. For a company with an EBITDA of around $350,000, that is the difference between comfortable financing and impossible financing.

Note: Quebec has increased the small business deduction for taxation years beginning after April 29, 2026. For a company that meets the 5,500-paid-hour criterion, the combined rate drops to approximately 11.2%. The calculation changes little, but the advantage of the holding company increases slightly.

A rule to watch

Intercorporate dividends are not always tax-free. An anti-avoidance rule in the Income Tax Act (paragraph 55(2)) can convert certain dividends into capital gains, particularly when they exceed the income earned by the company after the acquisition. Dividends paid out of post-acquisition profits to repay the acquisition debt usually pose little difficulty, but have every significant dividend validated by your CPA.

Step 2: Plan for interest deductibility

The holding company problem

Interest on a loan taken out to buy shares is generally deductible. However, a holding company has no taxable income: the dividends it receives are deducted. The interest it pays therefore creates losses that it cannot use, at least not immediately.

The common solution: post-acquisition merger

The practice often involves merging the holding company and the purchased company after the closing, sometimes within months, sometimes at the start of the next fiscal year. The resulting company carries the acquisition debt and earns the operating profits. The interest becomes deductible against these profits, and the principal is repaid out of the company's after-tax earnings, without dividends.

The merger does have a cost: you now own the operating company shares directly, without a holding company above. If you want to return to a holding company structure for future investments or to protect surpluses, you will have to create a new one later via a tax rollover.

Other options

• Keep the holding company and have the purchased company pay reasonable management fees for services actually rendered. This approach is limited and must be justified.

• Have the purchased company borrow directly, when the lender accepts it and the structure permits.

• Accept that interest creates losses in the holding company for a few years, if the amounts are modest.

What about a personal purchase?

Interest paid personally on a loan to purchase shares is generally deductible against your income, including received dividends. This is a real advantage, but it does not compensate for the double layer of tax on the principal.

Step 3: Structure your equity injection

Your equity injection comes from your personal savings, which have already been taxed. You can invest them in a holding company in two ways:

• By subscribing for shares in the holding company. This money remains invested until sale or liquidation.

• By advancing funds to the holding company (shareholder loan or advance). The company can repay this advance to you later, tax-free, once the bank debt permits.

The second option is often more flexible: once the acquisition debt is repaid, you recover your equity without paying tax on a dividend. However, the lender will require that this advance be subordinated to its loan and not repaid before its own loan.

Example: the Drummondville buyer advances her $400,000 to her holding company instead of subscribing for shares. Once the acquisition debt is repaid, her company returns that $400,000 to her tax-free. If she had subscribed for shares, she would have had to pay herself $400,000 in taxable dividends to recover the same sum.

Step 4: Check the effect on the small business deduction

The reduced small business tax rate applies to the first $500,000 of eligible business income. This limit is shared among associated companies.

If you already own a company

If you already control another operating company (directly or through an existing holding company), the purchased company will generally be associated with it. The two will have to share a single $500,000 limit. For a buyer who already owns a profitable business, this can push some profit into the general tax rate of 26.5%. This consequence is the same whether you buy personally or through a company: it is common control that creates association.

Investment income

The $500,000 limit is also reduced when the group of associated companies earns more than $50,000 in passive investment income per year. A holding company that accumulates significant investments could therefore, eventually, reduce the purchased company's deduction.

The Quebec 5,500-hour criterion

In Quebec, the full reduced rate is granted only to companies whose employees were paid for at least 5,500 hours during the year (or the previous year), except in the primary and manufacturing sectors. A holding company without employees is not entitled to it, but it does not need it. The operating company must satisfy this requirement, and a post-acquisition merger does not change this criterion.

Step 5: Think about your own exit now

You have just bought, but the structure chosen today will determine how you can resell in ten or twenty years.

The cumulative capital gains exemption

The capital gains exemption on qualified small business corporation shares ($1,250,000 per individual) is only available to an individual. A holding company selling the shares of its subsidiary is not entitled to it.

This does not mean the holding company deprives you of the exemption. Upon resale, you can sell the shares of the holding company itself, which may be eligible if its assets consist mainly of shares of a qualified small business and meet the ownership criteria. You must then ensure the holding company does not accumulate too many unrelated investments, or remove them ("purify") before the sale.

The family trust

Some buyers place a family trust between themselves and the holding company from the moment of acquisition. It can allow for multiplying the capital gains exemption among several family members during a future sale. It is more complex planning, subject to strict rules (particularly the tax on split income), which should be decided with a tax expert before closing, not after.

Step 6: Consider the lender's requirements

The bank has its own way of viewing the structure. In a purchase via a holding company, it usually requires:

• that the purchased company guarantee the holding company's loan and grant it a mortgage on its assets;

• a mortgage on the shares of the purchased company held by the holding company;

• your personal guarantee, at least for a portion of the loan;

• a limit on the dividends and management fees the purchased company can pay, except for debt service.

A holding company does not protect you personally from acquisition debt: your guarantee exposes you anyway. Its advantage is fiscal, not to limit your liability to the lender.

Discuss the structure with the lender early, before the offer letter. Some lenders prefer to lend directly to the merged company. Others require the merger to be done within a specific timeframe. For financing structures, see Financing an SME purchase in Quebec.

Step 7: If you are buying from a family member

The buyer’s structure has a direct consequence for the seller when both are non-arm’s length, for example, a parent selling to their child’s holding company.

Section 84.1 of the Income Tax Act is intended to prevent an individual from withdrawing a corporation’s surplus as a capital gain rather than a dividend. When it applies, part of the price paid by a related corporation may be treated as a taxable dividend rather than a capital gain, and the seller then loses the capital gains exemption on that portion.

Since 2024, an exception allows this consequence to be avoided during certain qualifying intergenerational business transfers, subject to strict conditions: transfer of control, children’s participation in the business, deadlines to be met, etc. If you are buying the family business through a holding company, this is the first question to ask the tax specialist, even before talking about price.

Between arm’s length parties, section 84.1 does not apply. The seller can sell their shares to the buyer’s holding company and claim the exemption, if their shares qualify. For other sale-related issues, see Share sale or asset sale? Pros and cons.

Step 8: Evaluate costs and complexity

A holding company is not free. Budget for:

• incorporation and registration fees with the Registraire des entreprises;

• annual update filings and annual fees;

• an annual federal (T2) and Quebec (CO-17) corporate income tax return;

• annual financial statements, often required by the lender;

• legal and tax fees for the amalgamation, if applicable.

For most debt-financed acquisitions, these costs (generally a few thousand dollars per year) are low compared to the tax savings. For a $150,000 cash-paid acquisition, they may exceed the benefit.

What about an asset purchase?

When you buy assets rather than shares, the question arises differently. The buyer almost always buys through a corporation, rarely in their personal name. Buying assets personally means operating the business as a self-employed individual, with unlimited personal liability and profits taxed at personal rates.

The question then becomes: should the company purchasing the assets be owned directly by you or by a holding company? The same considerations apply: surplus protection, future exit, costs. But since the company purchasing the assets operates the business itself, it can deduct interest from the start, and an amalgamation is not necessary.

What happens to the purchased company, regardless of the structure

In a share purchase, whether you buy personally or through a holding company, you acquire control of the purchased company. This acquisition of control has tax consequences that must be anticipated:

• Deemed year-end: the corporation is deemed to end its taxation year just before the acquisition of control. It will have to file tax returns for this short year.

• Losses: unused capital losses are lost, and the use of accumulated business losses is restricted.

• CCPC status: the corporation must remain a Canadian-controlled private corporation to retain the small business deduction. A non-resident buyer, for example, would change this status.

These consequences do not depend on the choice between a personal purchase and a holding company. However, they must be integrated into the due diligence and closing schedule. See Analyzing financial statements: keys to a successful purchase.

Comprehensive example: the decision of the Drummondville buyer

Let’s take the food distribution business purchased for $1,600,000. Here is how the buyer structured the transaction with her CPA and lawyer:

The seller, who was unrelated to the buyer, sold their shares to the holding company and was able to claim the capital gains exemption on their gain.

Checklist: choosing the purchase structure

☐ Transaction structure confirmed: share vs. asset purchase

☐ Acquisition debt amount and repayment schedule established

☐ Pre-tax profit requirements calculated for both structures

☐ Strategy for interest deductibility chosen (amalgamation, management fees, other)

☐ Form of down payment decided: shares or advance

☐ Other companies owned identified and impact on the $500,000 limit assessed

☐ Quebec 5,500-hour criterion verified for the purchased company

☐ Exit and capital gains exemption strategy discussed

☐ Relevance of a family trust assessed before closing

☐ Non-arm’s length relationship with the seller verified (section 84.1)

☐ Structure presented to lender and collateral requirements known

☐ Consequences of acquisition of control anticipated (deemed year-end, losses)

☐ Annual costs of the structure estimated

☐ Holding company incorporated before signing the purchase agreement

The most common pitfalls

• Signing the letter of intent in your personal name. Specify that the buyer is “you or a company to be incorporated,” so you can substitute the holding company without renegotiating.

• Incorporating the holding company the day before closing. The lender, notary, and seller need its details well in advance. Create it as soon as the decision is made.

• Forgetting about interest deductibility. A holding company that pays interest without taxable income accumulates useless losses.

• Amalgamating without thinking about what comes next. Amalgamation solves the interest issue but makes the holding company disappear. Plan how you will recreate one.

• Ignoring associated companies. A buyer who already owns a business may lose part of the small business deduction.

• Letting the holding company accumulate investments. This can compromise the capital gains exemption on resale and reduce the small business deduction.

• Buying the family business without planning for section 84.1. The selling parent may lose the capital gains exemption.

• Believing the holding company protects you from the lender. Your personal guarantee binds you anyway.

For other common errors, see The 5 most common mistakes during a business transfer in Quebec.

Can you choose the structure yourself?

You can perform the step 1 calculation yourself. You only need to know the debt amount, the corporate tax rate, and your marginal rate. If the difference is significant—and it is in most debt-financed acquisitions—the principle decision is made.

Implementation, however, requires a CPA or tax specialist: intercompany dividends, amalgamation, associated companies, exemptions, section 84.1, and trusts are technical matters where a mistake is costly. The lawyer or notary will incorporate the holding company, draft the purchase agreement in the name of the right entity, and prepare the amalgamation. Take these steps before signing the letter of intent, not during due diligence.

For the entire buyer’s journey, consult The ultimate guide to buying a business.

Sources

• Richter, Quebec income tax tables 2026

• Quebec Ministry of Finance, Information Bulletin 2026-3: increase in the small business deduction rate

• Revenu Québec, Increase in the small business deduction rate

• CPA Canada, Business transfers to family members and employees: new tax rules applicable starting in 2024

• Justice Canada, Income Tax Act, section 249 (deemed year-end)

• Repreneuriat Québec, Financing a business purchase with a holding company

This article provides general information and does not replace tax, accounting, or legal analysis adapted to your situation.