Asset Purchase vs Share Purchase: Hidden Liability Risks in Ontario

When you buy a business, you can buy its assets or you can buy the shares of the corporation that owns them. The choice changes which debts and obligations you end up with, and it often comes down to what your due diligence turns up.

Neither structure is automatically safer. This article compares the main hidden-liability risks in Ontario so you can ask better questions before you settle on a structure.

The basic difference

In an asset purchase, you buy selected assets and contracts, and the seller keeps the corporation. In a share purchase, you buy the corporation itself, with its history. The employment obligations show the contrast: selling a company's shares does not itself create a new employment relationship, so the corporation remains the employer and keeps its employment obligations.

Risks in an asset purchase

A security interest stays attached to collateral when it is sold, unless the secured party authorized the sale free of it, so you can take assets subject to the seller's lender's security. Search the registers before closing.

• Sales tax: Ontario's Ministry of Finance says people who sell a business or business assets must get a Retail Sales Tax (RST) Clearance Certificate, and a buyer who does not get one may be liable for RST owed at the time of the sale. The request must be made at least two weeks before the sale.
• WSIB: a person who acquires all or part of an employer's business is liable for amounts the employer owed immediately before the disposition. A purchase certificate waives WSIB's right to hold the buyer liable up to the date of disposal, and it is valid for 30 days.
• Employees: if you employ the seller's employees, their service with the seller counts, and you alone are responsible for later termination and severance, with no pro rata split.
• Union: if the seller is bound by a collective agreement, the buyer is bound by it until the Ontario Labour Relations Board declares otherwise. Building services is an exception.
• Related-party buyers: if the buyer is a non-arm's-length person, spouse or common-law partner, or minor, the buyer can be jointly liable for the seller's tax debts, capped by a formula.

Risks in a share purchase

You inherit the corporation as it is. Directors at the time a corporation fails to remit source deductions are jointly and severally liable with it, including interest and penalties, and the corporation keeps that liability after a share sale. Directors are also liable for unremitted GST/HST net tax.

There are limits. A director is not liable if they exercised the care, diligence and skill that a reasonably prudent person would have, and no action may be started more than two years after the director last ceased to be a director. GST/HST rules include a due-diligence defence and a similar two-year limit. These rules mainly protect the former directors, but the unpaid amount may still sit with the corporation you now own.

Tax deemed trusts can bind the seller's property for unremitted payroll deductions and GST/HST. Whether they follow assets into an arm's-length buyer's hands depends on the facts, so treat them as risks to address through searches and holdbacks rather than automatic buyer liability.

How due diligence findings shape the choice

Serious unknowns (unfiled returns, unpaid source deductions, disputes with former staff) tend to push buyers toward an asset purchase, or toward a share purchase with strong indemnities and a holdback. Heavy reliance on contracts or licences that cannot easily be transferred may favour buying shares.

Tax treatment matters too. In a sale of a business, buyer and seller can jointly elect on Form GST44 that no GST/HST is payable where the buyer acquires all or substantially all of the property needed to carry on the business. CRA generally treats this as 90% or more. The election cannot be made if the seller is a registrant and the buyer is not, or if only one or more assets are sold rather than the business. Ask your accountant how it applies.

What to do next

• Ask the seller why they prefer one structure, then compare it with your due diligence results.
• Search liens and writs against the seller, and get a written authorization so CRA will discuss its accounts with your representative.
• Request the RST clearance and WSIB purchase certificate early where they apply.
• Review employee and union records before deciding how to treat staff.
• Negotiate holdbacks, indemnities and warranties to cover remaining risks.
• Have a lawyer and accountant review the structure before you sign.

Frequently asked questions