Buying a Business and Its Building in British Columbia: Two Contracts?

You have found a business that owns the building it operates from. Now you are wondering whether one agreement can cover everything, or whether the land needs its own contract.

Whether one document or two is used is largely a drafting choice, and it depends on how the deal is structured. What does not change is that the business and the land are treated differently for tax and registration, so the two parts have to be coordinated.

This article covers the law of British Columbia.

Two parts, treated differently

A business sale usually involves the operating assets: equipment, inventory, goodwill, accounts receivable and so on. The building is real property. The tax rules treat them differently, which is the main reason many buyers keep them as separate pieces, even when they are part of one overall deal.

Property transfer tax on the land

If you buy the building, the purchaser pays property transfer tax on the land: 1% on the first $200,000 of fair market value, 2% from over $200,000 to $2,000,000, and 3% above $2,000,000. It is based on fair market value on the day of registration at the Land Title Office. Commercial property is taxed at the general rates.

The further 2% on residential value above $3,000,000 applies only to residential property, and for mixed-use property only to the residential portion. Foreign nationals, foreign corporations and taxable trustees may owe additional tax on residential property in specified areas. Because the tax is tied to fair market value at registration, how the price is split between the land and the business matters, so get advice on the allocation.

GST, PST and other tax points

• Where the buyer acquires all or substantially all the property needed to carry on the business, the supplier and a registrant recipient may jointly file a prescribed election so no GST is payable on supplies under the agreement.
• The recipient files that election by the due date of its GST return for the first reporting period in which tax would otherwise be payable.
• The election is not available where the supplier is a registrant and the recipient is not.
• Tax still applies to a taxable supply of a service by the supplier, and to taxable supplies of property by lease or licence.
• Where the recipient is not a registrant, tax still applies to a taxable sale of real property.
• A purchaser buying a business in a bulk transaction should obtain a PST clearance certificate, or be liable for any outstanding amount owed by the collector.

The PST clearance certificate can be requested with the collector's consent, online through the Application for Clearance or on printable form FIN 447. It confirms PST, penalties and interest are paid up to the issue date.

One agreement or two?

The law on the structure of the paperwork is flexible, so you should expect choices. Some deals use one agreement with separate parts for the business assets and the land. Others use a business purchase agreement and a separate contract of purchase and sale for the real estate. Because the land transfer is registered at the Land Title Office, the real estate side needs its own closing steps whichever way you draft it.

Structure matters too. An asset sale and a share sale are taxed differently, and sale proceeds are not all taxed as capital gains. If the building sits in a different company from the business, you may be dealing with two sellers. If the parties are related, special liability rules can apply to asset transfers. Which approach suits you depends on the facts, and a lawyer and an accountant can confirm it.

What to do next

• Find out who owns the land and who owns the business, and whether they are the same person or company.
• Decide whether you are buying assets or shares, since the tax treatment differs.
• Ask your accountant how the price should be allocated between the land and the business.
• Budget for property transfer tax on the land.
• Plan the PST clearance certificate and any GST election early.
• Make sure the closing dates for the business and the land match.

Having a lawyer review both parts before you remove conditions helps keep the business and the building aligned.

Frequently asked questions