Buying a Business in Ontario: Legal Checklist for Buyers

You have found a business you like, the numbers look workable, and the seller wants an offer. Before any money changes hands, there are legal items that are much easier to deal with now than after closing.

This checklist walks through what to confirm, negotiate and sign when buying a business in Ontario. It is general information, not advice on your deal, because the right answers depend on how the purchase is structured and what the business actually owns.

Decide whether you are buying assets or shares

In an asset purchase you buy particular things, such as equipment, inventory, the name, customer lists and the lease. In a share purchase you buy the corporation itself. The structure affects nearly every item below.

• In a share purchase no new legal entity is created, so the WSIB says no purchase certificate is required, and the corporation's WSIB account, including any amounts owing, stays with the corporation.
• In a share purchase, the change in ownership does not affect the tax values of the corporation's assets, and buying shares is generally not subject to GST/HST.
• In an asset purchase, you may need a new business number and your own payroll and GST/HST accounts.

Ontario's Bulk Sales Act was repealed on March 22, 2017, so buyers of business assets no longer have to follow bulk sales procedures. If a page tells you otherwise, it is out of date. One related rule remains: where the seller holds, or must hold, a retail sales tax vendor permit, the Retail Sales Tax Act still requires the seller to get a certificate from the Minister, and a buyer who does not get the duplicate certificate is responsible for the seller's unpaid taxes, penalties and interest.

If it is a franchise, disclosure comes first

A franchisor must give you a disclosure document at least 14 days before the earlier of signing any agreement relating to the franchise or paying any consideration to the franchisor. It must be delivered as one document at one time, and the franchisor must give you a written statement of any material change before you sign or pay.

The document should cover the franchisor's background, litigation, bankruptcy history and financial statements, plus the costs, proposed agreements, territory, supplier restrictions, termination, renewal and transfer terms, training, advertising funds and a list of current and former franchisees.

There are exceptions. For example, disclosure is not required when an existing franchisee resells for its own account without the franchisor being involved in the grant, and the regulation sets exemptions for total initial investments of no more than $15,000 or more than $3,000,000. Whether one applies to your purchase is worth confirming before you rely on it.

Employees and non-competition promises

• If you employ one of the seller's employees, the employment is deemed not terminated for purposes of the Employment Standards Act, 2000, and time worked for the seller counts as time worked for you.
• That carries over vacation, leave, notice of termination and severance pay entitlements.
• Continuity does not apply if you hire the employee more than 13 weeks after the earlier of their last day with the seller and the day of the sale.

Buyers usually want the seller not to compete. Since October 25, 2021, the Act bans non-compete agreements between employers and employees. There are exceptions for a non-compete agreed as part of a sale of a business where the seller immediately becomes the buyer's employee, and for an employee who is an executive, such as a CEO, president or chief financial officer. The ban does not prohibit non-competes entered into before that date. If your seller does not fit these situations, how a non-compete is treated depends on the facts, so it is worth confirming with a lawyer before you rely on it.

Lease, liens and tax steps before closing

• Lease: if the lease bars assignment without the landlord's consent, it is deemed to say consent cannot be unreasonably withheld, unless the lease expressly says otherwise.
• Lease: if the landlord refuses or neglects to consent, the tenant, assignee or subtenant can apply to a judge of the Superior Court of Justice.
• Liens: run a Personal Property Security Registration search; it covers personal property, not real property.
• Liens: a buyer of a business's assets outside the ordinary course does not get the protection given to ordinary-course buyers, which is why lien discharges matter.
• WSIB: in an asset purchase, request a purchase certificate before the date of sale; it is valid for 30 days.
• GST/HST: if you acquire all or substantially all of the property needed to run the business, you and the seller may jointly elect on Form GST44 so no GST/HST is payable on the sale, but GST/HST still applies to services the seller supplies, to property supplied by lease or licence, and, if you are not a registrant, to a taxable sale of real property.
• Price: set reasonable prices for individual assets in the agreement, or allocate the price among assets, inventory and goodwill.

The GST44 election cannot be used if the seller is a GST/HST registrant and the buyer is not. If the seller is a non-resident selling taxable Canadian property, special withholding rules can apply to you as buyer.

What to do next

Before you sign an offer or letter of intent, make sure it is conditional on the checks above. Then:

• Decide with your lawyer and accountant whether assets or shares make more sense.
• List every contract, licence and lease the business depends on.
• Ask the seller for the documents needed to run the searches.
• Get the WSIB and tax steps on the closing timeline.
• Have the purchase agreement reviewed before you pay a deposit.

Frequently asked questions