What is a holdback or escrow when buying a business in Alberta, and how does it protect the buyer?
This answer covers the law of Alberta.
A holdback is part of the purchase price that the buyer keeps after closing, and an escrow is part of the price held by a neutral third party, such as a lawyer or trust company, until agreed conditions are met. Both protect a buyer by keeping money available if a problem surfaces after closing, such as an undisclosed debt or a breach of the seller's promises.
The purchase agreement sets the details: how much is held, how long it stays in place, what kinds of claims can be made, how a claim is notified, and what happens if the seller disagrees. If a valid claim is agreed or decided, the amount is paid to the buyer from the held money, and whatever remains is released to the seller at the end of the period. The amount and length are matters of negotiation, so there is no universal figure.
Tax treatment is worth raising with an accountant. Without an election, each property and service in a business sale is treated as a separate supply with consideration allocated to it, and 5% GST can apply to the taxable parts. A lawyer can draft the holdback or escrow terms so they fit your deal.
Key takeaways
- A holdback is part of the price the buyer keeps after closing, while an escrow is part of the price held by a neutral third party.
- The purchase agreement sets the amount, the holding period, the types of claims and how a claim is made.
- Valid claims are paid from the held money, and what remains is released to the seller at the end of the period.
- Without an election, 5% GST can apply to the taxable parts of a business sale, so raise tax treatment with an accountant.