Asset Purchase Agreement Ontario: How the Deal Actually Works

If you are buying or selling the assets of a small business, such as equipment, inventory, customer lists and the name, you will usually sign an asset purchase agreement. Unlike a share deal, the buyer does not take over the seller's corporation.

Below is a walk-through of how these deals are typically structured, signed and closed in Ontario, with the tax and employment points that most often catch owners off guard.

What an asset purchase agreement does

An asset purchase agreement lists what is being sold, what the buyer pays and what the buyer is not taking on. Because the buyer chooses the assets, the buyer can generally leave behind debts and obligations it did not agree to assume. The trade-off is more paperwork: each asset has to be described, and contracts, leases and licences often need the other side's consent to be transferred.

• Assets included, such as equipment, inventory, goodwill, intellectual property, the business name and customer records.
• Assets and liabilities excluded, and which debts the buyer will or will not assume.
• The purchase price and how it is divided among the assets.
• Contracts, leases and licences to be assigned, and who must consent.
• Employees: who the buyer will offer jobs to and when.
• Conditions to closing, the closing date and what each side delivers on that day.
• Promises about the business and what happens if they are wrong.

GST/HST on an asset sale

Sales of business assets can trigger GST/HST, but there is a relief. Under section 167(1) of the Excise Tax Act, the seller and buyer can jointly elect on the prescribed form so that no GST/HST is payable on the business assets, if the buyer acquires ownership, possession or use of all or substantially all of the property necessary to carry on the business.

The CRA generally treats "all or substantially all" as 90% or more. Property the buyer needs but does not acquire should generally be worth no more than 10% of the fair market value of all property needed to run the business.

Because a missed deadline can be costly, have an accountant confirm the election before closing.

Employees in an asset deal

Many owners assume employees start fresh with a new owner. Under the Employment Standards Act, 2000, section 9(1), if an employer sells a business or part of it and the purchaser employs an employee of the seller, the employment is deemed not terminated or severed for ESA purposes, and employment with the seller counts as employment with the purchaser.

• The purchaser is not obliged to hire the seller's employees; if it does not, section 9(1) does not apply.
• Continuity still applies if the purchaser hires on lower pay, a different role or new terms, and the employee cannot waive it.
• Continuity does not apply if the purchaser hires the employee more than 13 weeks after the earlier of the employee's last day with the seller or the sale date.
• Service with the seller counts toward later calculations of vacation, leave eligibility, termination notice and severance.
• The employee may instead reject the purchaser's offer and treat the sale as a termination by the seller.
• "Sells" includes leasing, transferring or disposing of a business in any other way.

Accrued vacation pay that came due before the sale stays with the seller, while pay that came due after the sale generally flows to the purchaser.

Land, corporate steps and other costs

If the assets include real property, an asset deal triggers Ontario land transfer tax on the land value. For agreements after November 14, 2016, the rates are 0.5% up to $55,000, 1.0% from $55,000 to $250,000, 1.5% from $250,000 to $400,000 and 2.0% above $400,000; the 2.5% tier applies only to land with one or two single-family residences. Toronto also charges its own municipal land transfer tax, so ask about it if the property is there.

A buyer should also contact its CRA tax services office about the ownership change, may need a new business number and should review its payroll accounts. Large deals may need Competition Act notification, but the 2026 thresholds are $93 million for transaction size and $400 million for party size, and typical small-business deals fall well below them.

If you are moving your own assets into a new corporation before a sale, a section 85 election may allow a tax-deferred rollover on an agreed amount. The election is due on or before the earliest filing deadline of any electing party for the year of the transaction, and a late election is accepted within 3 years of that date with a penalty. Related-party transfers can also bring joint liability for tax under section 160.

What to do next

• Make a full list of the assets, contracts, leases and licences, and who must consent to a transfer.
• Decide which liabilities, if any, the buyer will take on.
• Ask an accountant whether the GST/HST election is available and who files what, and by when.
• Plan how employees will be told and offered positions, keeping the 13-week window in mind.
• If land is included, get a land transfer tax estimate, including any municipal tax.
• Have a lawyer draft or review the agreement and the closing documents before signing.

Frequently asked questions