Asset Purchase Agreement in Ontario: Key Terms for Buyers and Sellers

In an asset purchase, the buyer acquires chosen parts of a business, such as equipment, inventory, contracts and goodwill, rather than the company that owns them. That can make it easier to leave unwanted liabilities behind.

The agreement does the heavy lifting. This article walks through the main terms an Ontario asset purchase agreement should address and some rules that apply even if the contract says nothing.

The asset list and the excluded list

The agreement should name every asset being sold, in enough detail that nobody argues later about what was included. Typical categories are equipment, vehicles, inventory, leases, customer lists, intellectual property, names and goodwill. A matching list of excluded assets and excluded liabilities is just as important, since it shows what the buyer is not taking on. It has limits, though: the buyer is still liable by statute for the seller's WSIB amounts owing immediately before the sale.

Before buying used assets, a buyer can search Ontario's Personal Property Security Registration system through ServiceOntario's Access Now to see whether a lien has been registered. Searches can be run against an individual debtor, a business debtor or a motor vehicle. Fixtures may also be registered on land title, so ask a lawyer whether further searches make sense.

Price allocation and tax

If the agreement sets out individual asset prices and those prices are reasonable, the buyer can use them to calculate capital cost allowance. Otherwise the buyer must reasonably allocate the price to each asset at fair market value, and the balance goes to goodwill. The CRA says the buyer's allocation should match the amounts the seller used when reporting the sale.

Where part of a payment is for a restrictive covenant such as a non-compete, the Income Tax Act deems each part to be paid for the item it reasonably relates to. As a general rule, amounts received for a restrictive covenant are included in income. That rule is switched off in set cases, including where the amount is included in proceeds for goodwill and an election is made, or where both parties elect in prescribed form on a sale of an eligible interest such as shares. An accountant should confirm the treatment for your deal.

A restrictive covenant election must include a copy of the covenant. For a grantor resident in Canada it is due by the filing-due date for the tax year that includes the date the covenant was granted; otherwise it is due six months after the day it was granted.

Tax elections that affect the price

The GST/HST election cannot be made if the seller sells only one or more assets rather than the business or substantially all of its property. It is also not available where the seller is a registrant and the buyer is not. Even with the election, GST/HST still applies to taxable services the seller is to provide, to leases and licences, and, where the buyer is not a registrant, to taxable sales of real property. A registered buyer must file by the due date of its GST/HST return for the first reporting period in which tax would otherwise have become payable, though the Minister may allow a later date.

Employees, contracts and personal information

If a buyer employs one of the seller's employees after an asset sale, the employment is deemed not to have been terminated for Employment Standards Act purposes, and time worked for the seller counts as time worked for the buyer. "Sells" includes leases and transfers. The rule does not apply if the buyer hires the employee more than 13 weeks after the earlier of the employee's last day with the seller and the day of the sale.

The general ESA ban on non-competes does not apply only because the seller becomes an employee; all of the sale-of-business conditions must be met, and courts can still decide whether the non-compete is enforceable. The ban does not apply where a business or part of one is sold or leased, the seller immediately becomes the buyer's employee, and the parties agree to restrict the seller from competing as part of the sale. The Ontario guide describes that business as a sole proprietorship or partnership. Executives are also outside the ban.

Personal information can be shared during a prospective deal without consent only if the parties have an agreement limiting its use and disclosure to purposes related to the deal, the recipient protects it with suitable safeguards and returns or destroys it within a reasonable time if the deal does not proceed, and the information is needed to decide whether to proceed and to complete the deal. Contracts with suppliers and customers may need consent to be assigned, so check each one.

Liabilities and closing deliveries

Even in an asset deal, the buyer is liable for all amounts the seller owed under the Workplace Safety and Insurance Act immediately before the sale. A WSIB purchase certificate relieves that liability up to the sale date, is valid for 30 days from issue, and requires the seller's account to be in good standing. The seller must also close its payroll account, and contact its tax services office to close a GST/HST account.

• Signed bill of sale and assignments of contracts and leases
• Lien search results and releases of any registered security
• WSIB purchase certificate, timed within its 30-day window
• Signed GST44 and any income tax elections
• Employee transition and any non-compete terms
• Landlord, supplier and customer consents
• Statement of adjustments for the closing date

What to do next

Start with a detailed asset and liability list, then ask an accountant to review the allocation and elections before the price is fixed. A lawyer can draft the excluded-liability and closing terms so they match the real deal.

Frequently asked questions