We're Selling the Corporation's Building. What Tax Comes Out of It?

The tax comes in layers, and each layer has its own rules

One sale produces several distinct tax events inside the corporation, and adding them up wrong is how sellers misjudge their net proceeds by six figures. The gain over what the property cost is a capital gain. The depreciation claimed against the building over the years comes back as recapture. The untaxed half of the capital gain is not lost, it becomes a credit the corporation can pay out tax-free. And HST has its own track that has nothing to do with income tax at all. Here is the anatomy of the sale before we take each layer in turn:

Two cash items sit outside the tax layers but inside your net proceeds: the mortgage discharge, including any prepayment penalty for breaking the term early, and the closing costs of the sale itself. Both come out before any of the tax math starts, and the penalty in particular deserves a call to the lender before you commit to a closing date, because its size can move the timing decision on its own.

The land-and-building split decides how much is recapture

The purchase price allocation between land and building is the first number worth negotiating, because it changes the character of your income. Only the building was depreciable, so only the building portion of the proceeds can trigger recapture: broadly, to the extent the building sells for more than its undepreciated capital cost, the CCA claimed over the years is pulled back into income, and recapture is fully taxable, with none of the half-taxed treatment a capital gain enjoys. Proceeds allocated to land, by contrast, can only ever produce capital gain. A buyer of depreciable property wants the opposite allocation you do, because a high building value becomes their future CCA base, so the split lands in the purchase agreement as a genuinely negotiated term, and it should be negotiated with the tax result in view, not filled in by the lawyers at the end.

Long ownership makes recapture the sleeper of the whole file. A building held for twenty years with CCA claimed throughout can have a small undepreciated balance left, so even a sale at a modest gain over original cost releases two decades of deductions back into income at once. The reverse case exists too: a building that sells below its undepreciated cost produces a terminal loss, fully deductible, which occasionally makes a soft market the right moment to sell a tired property. Either way, the allocation must be reasonable and consistent on both sides of the deal, because an allocation the buyer reports differently than you do is an invitation for review.

The capital gain: half taxed now, half into the capital dividend account

The gain above the property's cost is a capital gain, and inside a corporation it is taxed as investment income: the taxable half faces a combined corporate rate of roughly 50%, but a portion of that tax is refundable, returned to the corporation as it pays taxable dividends to shareholders under the refundable dividend tax mechanism. The design is to make earning investment income through a corporation roughly comparable to earning it personally, and the practical consequence is that the real corporate tax cost of the gain depends on your dividend plans, not just on the sale.

The half of the gain that is not taxed is the quiet prize of the whole transaction. It credits the corporation's capital dividend account, and with a properly filed election the corporation can pay that balance to its shareholders as a capital dividend, completely tax-free in their hands. On a large building gain this is often the single biggest planning lever in the file, and it rewards care: the account balance must be confirmed before the dividend is declared, the election has to be filed correctly, and paying out more than the account holds attracts a punitive tax. Sequencing matters too, because capital losses realized elsewhere reduce the account, so the order of dispositions in a year can change how much comes out tax-free.

What the shareholders actually receive, then, is a blend: a tax-free capital dividend from the untaxed half, and taxable dividends that trigger refunds of the refundable tax as they are paid. Modelling that blend, this year against future years, is the difference between a sale that was taxed once, properly, and one that leaked at every step.

How the building was used changes both the rate and the aftermath

A building the corporation occupied for its own active business is treated more kindly than one it rented out, in three ways that matter here. First, the character of the recapture follows the use: recapture on an active-business building lands as active business income, potentially taxed at the low small-business rate, while recapture on a rental property is investment income at the high rate. Second, the small business deduction grind: passive investment income above a threshold across an associated group shrinks access to the small-business rate in the following year, but the measure of investment income for this rule generally excludes gains on property used principally in an active business, so an owner-occupied building's sale typically spares you the grind that a rental building's sale can trigger. Third, the replacement property rules: where a property used in an active business is sold and replaced within the allowed window, the gain and recapture can potentially be deferred against the new property's cost, a rollover that is generally not available for rental real estate.

Each of these carries conditions, and mixed-use buildings, part occupied, part tenanted, sit on the boundary where the facts decide. This is also the moment to say the obvious thing a page cannot: the time to influence how a building is characterized is while you own it, not the year you sell it. If the group is only now deciding how to hold its real estate, the structural questions are covered in should my corporation buy commercial property and who should own the building: personally, opco or holdco; the exit you are reading about now is the direct consequence of those earlier choices.

HST, the mortgage payout, and the cash that actually lands

HST on the sale of commercial real property is real but usually bloodless. The sale is generally a taxable supply; the relief is mechanical: where the purchaser is HST-registered, the buyer, not you, accounts for the tax by self-assessing it on their own return, and a fully commercial buyer claims the offsetting credit in the same filing, so no tax moves at closing. Your job as vendor is to verify the purchaser's registration before closing and paper the agreement accordingly, because a vendor who fails to collect from an unregistered buyer owns the problem. Selling to a numbered company formed last week is exactly the situation where you confirm the registration rather than assume it.

Then the cash sequence, which is where sellers should start rather than finish. From the gross price, subtract the mortgage discharge and any prepayment penalty, real estate commissions and legal costs; from what remains, reserve for the corporate tax on recapture and on the taxable half of the gain; and only then do you know the distributable pool, part of it eligible to come out tax-free through the capital dividend account, the rest as taxable dividends that release refunds as they are paid. If other properties in the group are financed, tell the lenders early: a sale changes the covenant picture, and most facilities have lender reporting requirements and sometimes consent rights that are far cheaper to respect than to repair. And before committing to what happens next, build financial projections for the group without the building, its rent, its costs and its debt service all leave the statements at once, so next year's cash flow looks nothing like last year's. Modelling the after-tax proceeds and the redeployment plan is exactly the work of a business financing and projections CPA in Ontario, and it belongs before the listing agreement, not after the sale.

Getting the money out, and what changes the answer

The corporation receives the proceeds; getting them to you is its own decision with its own timeline. The usual sequence is the capital dividend first, tax-free with the election filed, then taxable dividends sized to draw out the refundable tax efficiently, sometimes spread over more than one year to manage personal rates. The alternative is to leave the proceeds invested inside the corporation, accepting the high rate on future investment income in exchange for deferring personal tax, which is a genuine strategy question rather than a default. Five facts drive the whole file:

• The land-building allocation. It sets how much of the price is fully taxed recapture versus half-taxed gain, and it is negotiable while the deal is being papered.
• The CCA history. Decades of claimed depreciation can make recapture, not the gain, the biggest number in the file.
• How the building was used. Owner-occupied, rental or mixed changes the rate on recapture, the small business deduction aftermath, and whether a replacement-property deferral is even possible.
• What happens to the proceeds. Paying them out, reinvesting in another property, or holding them as corporate investments each produces a different total tax bill on the same sale.
• The timing. Which fiscal year the sale lands in, what other gains and losses share that year, and the prepayment penalty on the mortgage can each move the net result on their own.

We run building sales as defined-scope work under Strategic Projects: model the layers before the listing, negotiate the allocation with the tax result in view, confirm the HST mechanics and the capital dividend account, file the elections, and plan the payout across years. The broader planning around corporate gains and dividends sits with our tax planning work. A free 15-minute discovery call before you list is usually enough to tell you the approximate shape of the tax and which levers are still available to move it.