Assumed vs. Excluded Liabilities in an Ontario Asset Purchase Agreement

One of the real advantages of structuring a business purchase as an asset deal, rather than a share deal, is that buyer and seller get to negotiate — liability by liability — what actually comes along with the sale. Nothing transfers automatically just because it's connected to the business.

That flexibility is also where deals go wrong. Getting the assumed liabilities list wrong can leave a buyer holding an obligation they thought they'd left behind, or leave a seller retaining exposure they believed they'd sold off along with the business. This article walks through how that division typically works in an Ontario asset purchase agreement (APA), and the places where "excluded" doesn't always mean what people assume it means.

The Basic Rule: Liabilities Follow the Agreement, Not the Business

In a share purchase, the corporation itself — with all of its historical liabilities, known and unknown — changes hands. An asset purchase works differently. The buyer and seller expressly agree, in the APA itself, exactly which specific liabilities the buyer is taking on. Everything else stays behind with the selling corporation by default.

That means the APA's assumed-liabilities clause (and any accompanying schedule) isn't a summary of what naturally follows the assets — it's the actual, negotiated boundary line. If a liability isn't listed as assumed, the general expectation is that it stays with the seller.

Liabilities Buyers Typically Assume

• Obligations arising under specifically assigned contracts and leases, from the closing date forward
• Specifically identified trade payables, where the parties have negotiated for the buyer to take them on
• Ongoing obligations tied to the purchased assets going forward (for example, agreed warranty or service commitments on products the business sold)
• In some deals, specific employee-related liabilities — such as accrued vacation entitlements — for employees the buyer chooses to hire

Liabilities Sellers Typically Keep

• Tax liabilities relating to the period before closing
• Existing or threatened litigation arising from pre-closing conduct
• Liabilities that weren't disclosed, or that are contingent and unquantified at closing
• Obligations to employees the buyer does not hire
• Debts secured against assets the seller is retaining
• Environmental liabilities arising before closing, unless specifically negotiated otherwise

Quick Reference

Employees Are Their Own Special Case

It's a common assumption that buying a business's assets, rather than its shares, gives the buyer a clean slate on employees. That's not entirely accurate. Under Ontario's Employment Standards Act, 2000, where a business (or part of one) is sold as a going concern and the buyer hires the seller's employees, the employees' employment is generally deemed not to have ended — their prior service with the seller counts toward statutory entitlements like vacation, leaves, and notice or severance, even though the employer entity has technically changed.

That continuity rule has a limit built into it: it generally does not apply if the buyer hires the employee more than a defined number of weeks after the earlier of the employee's last day with the seller or the day of the sale — a rule worth confirming precisely with your lawyer, since employment standards rules are updated from time to time.

It's also worth separating the statutory minimum from a bigger practical question: a buyer doesn't automatically inherit the seller's common-law reasonable-notice exposure just because statutory minimums carry over. That's a separate, additional question that deserves its own legal review.

Why "Excluded" Doesn't Always Mean Gone

Labelling a liability "excluded" in the APA is a promise between buyer and seller — it doesn't necessarily bind third parties. A creditor with a registered security interest against a specific asset under the Personal Property Security Act (PPSA) can, in some circumstances, still have that interest follow the asset into the buyer's hands, regardless of what the agreement says about excluded liabilities, unless the interest is properly discharged or the buyer takes the asset free of it under PPSA priority rules. That's exactly why a PPSA search before closing is standard due diligence, not an optional extra.

It's also worth knowing that Ontario has no statutory bulk-sales creditor-notice regime — the old Bulk Sales Act was repealed in 2017. Buyers can no longer rely on that kind of statutory notice process to flush out a seller's unpaid trade creditors before closing. Protection today comes entirely from due diligence, representations and warranties, indemnities, and holdbacks, negotiated into the agreement itself.

Frequently asked questions