- In an asset purchase, the buyer acquires specific assets of the business — equipment, inventory, intellectual property, goodwill, customer lists, leases — rather than the company itself.
- In a share purchase, the buyer acquires the shares of the corporation that operates the business.
- | Factor | Asset Purchase | Share Purchase | |---|---|---| | Who takes on past liabilities?
When you are buying or selling a business in Ontario, one of the first decisions you will face is whether to structure the deal as an asset purchase or a share purchase. This single structural choice ripples through your tax bill, your liability exposure, your employees' entitlements, and the ease of transferring contracts. Understanding the difference before you sign a letter of intent can save both sides a great deal of grief — and money.
This article explains the mechanics of each structure, the typical positions buyers and sellers take, and the legal considerations you need to weigh with a lawyer and an accountant.
What Is an Asset Purchase?
In an asset purchase, the buyer acquires specific assets of the business — equipment, inventory, intellectual property, goodwill, customer lists, leases — rather than the company itself. The corporation that previously owned those assets stays with the seller (along with any liabilities that belong to it).
What buyers choose assets
Buyers generally prefer asset deals because:
- Clean liability start. You are not buying the company's history. Unknown tax liabilities, lawsuits, or environmental issues stay with the seller's corporation.
- Step-up in cost base. You can allocate the purchase price to depreciable assets and write them down from the new, higher value — a meaningful tax benefit in future years (confirm with your accountant).
- Cherry-picking. You can negotiate to exclude assets you don't want (old litigation, a specific lease, etc.).
What sellers dislike about asset deals
Sellers typically prefer share deals because an asset sale can be less tax-efficient. The proceeds flow into the corporation, then must be paid out again as dividends or salary — creating a potential double layer of tax. There is also more complexity: every asset must be transferred individually, and third parties (landlords, lenders, government agencies) may need to consent.
What Is a Share Purchase?
In a share purchase, the buyer acquires the shares of the corporation that operates the business. The corporation — with all its assets, contracts, and liabilities — comes with the deal.
Why sellers prefer shares
- Capital gains treatment. Individual shareholders may be able to shelter up to a lifetime limit of capital gains using the Lifetime Capital Gains Exemption (LCGE) on the sale of qualifying small business corporation shares. As of writing, this limit is significant — verify the current amount with your accountant.
- Simpler transfer. Contracts, leases, and licences stay in the corporation's name. No third-party consents are usually needed unless a contract has a change-of-control clause.
Why buyers are cautious about shares
Buyers inherit everything — including hidden liabilities. This is why thorough due diligence and strong representations and warranties (backed by indemnities) are central to every share purchase agreement. Buyers frequently negotiate escrow holdbacks or purchase price adjustments to account for risks discovered after closing.
Comparing the Two Structures: A Quick Reference
| Factor | Asset Purchase | Share Purchase |
|---|---|---|
| Who takes on past liabilities? | Seller's company (mostly) | Buyer (it comes with the shares) |
| Tax for individual seller | Usually less favourable | May qualify for LCGE |
| Contract / licence transfers | Needs consents | Generally automatic |
| Employee continuity | ESA obligations vary | Employment usually continues |
| Cost base step-up for buyer | Yes | No |
| Complexity of transfer | Higher | Lower |
Hybrid Deals and the "Bump" Election
In some deals, the parties agree on a share purchase but the buyer wants the tax benefit of an asset step-up. Canadian tax law includes mechanisms (sometimes called a "section 88 bump") that can achieve this after the sale. These provisions are complex — this is firmly territory for a tax accountant or tax lawyer, not a general summary. If this matters to your deal, raise it early.
Which Structure Will Your Deal Use?
There is no universal answer. It depends on:
- The seller's personal tax situation — is the LCGE available and valuable?
- The buyer's risk tolerance — how clean is the corporation's history?
- The nature of the assets — are key contracts assignable?
- Employee considerations — what obligations exist under the Employment Standards Act, 2000?
- Lender requirements — does the buyer's financing dictate the structure?
Most deals involve negotiation between buyer and seller over the structure, sometimes with a price adjustment to compensate whichever side gives ground on tax.
Frequently asked questions
Can we split the deal — some assets, some shares?
This is uncommon in a single transaction but deals can be structured creatively. For example, the buyer might purchase specific assets while the seller retains the corporation. A combined asset and share transaction is occasionally used in complex situations. Your lawyer and accountant need to work together on any hybrid approach.
What happens to employees in an asset deal?
Under Ontario's Employment Standards Act, 2000, if a buyer purchases the business (not just a collection of assets) and the employees continue performing the same work, those employees may be entitled to have their service recognized continuously. This is a nuanced area — get specific legal advice before making any representations to employees.
Do I still need a lawyer if both sides agree on the structure?
Yes. Even an agreed structure needs a proper purchase agreement with representations, warranties, conditions, and indemnities. A handshake on structure is not a contract.
How long does the deal take to close?
Most private business purchases in Ontario take four to twelve weeks from a signed letter of intent to closing, depending on the complexity of due diligence and third-party consents required.
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