- A business and its building are different kinds of property, and the tax and paperwork treat them differently.
- Property transfer tax applies to the land, at 1% on the first $200,000, 2% from over $200,000 to $2,000,000 and 3% above $2,000,000.
- PST does not apply to real property or to the sale of shares, but it can apply to equipment in an asset sale.
Some businesses own the premises they operate from. If you are buying one, you may wonder whether a single agreement can cover the business and the building, or whether the land needs its own contract and its own paperwork.
The honest answer is that it depends on how the deal is built. This article explains the pieces that are treated differently so you can see why lawyers often deal with the land side separately, and what to ask before you sign.
This article covers the law of British Columbia.
Why the business and the building are different
When you buy a business, you may be buying shares of a company, or you may be buying its assets such as equipment, inventory, goodwill and customer accounts. The building is land, which is a separate kind of asset with its own registration system.
One agreement can describe a combined deal, but the land still has to be transferred and registered. Property transfer tax is worked out on the fair market value of the land on the day of registration at the Land Title Office. That is a land-specific step that does not apply to equipment or goodwill.
Whether the land is owned by the business itself, by the seller personally or by a related company also matters. If you are unsure who owns it, that is the first thing to confirm.
What tax applies to each part
| Part of the deal | How it is treated |
|---|---|
| Land and building | Purchaser pays property transfer tax: 1% on the first $200,000, 2% from over $200,000 to $2,000,000, 3% above $2,000,000 |
| Equipment, hardware, supplies (asset sale) | PST can apply to taxable assets such as affixed machinery and equipment |
| Goodwill, inventory, receivables | PST does not apply |
| Real property | PST does not apply |
| Shares of the business | PST does not apply to the sale of shares |
Commercial property is taxed at the general property transfer tax 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.
GST and the PST clearance certificate
If the buyer acquires all or substantially all the property needed to carry on the business, the seller and a registrant buyer may jointly file an election so no GST is payable on supplies under the agreement, but tax still applies to a taxable supply of a service by the seller and to taxable supplies of property by lease or licence. The election is not available where the seller is a registrant and the buyer is not. Where the buyer is not a registrant, GST still applies to a taxable sale of real property.
A buyer of a business should also obtain a PST clearance certificate. Without one, the buyer is liable for an amount equal to any outstanding amount owed by the seller as collector. The buyer applies, with the collector's consent, online or on form FIN 447, and the certificate confirms PST, penalties and interest are paid up to the issue date.
What to ask before you sign
- Is this a share purchase or an asset purchase, and who legally owns the land?
- Will the land be transferred in a separate document that is registered at the Land Title Office?
- Are the building and the business priced separately, so the value of the land is clear for transfer tax?
- Are you or the seller GST registrants, and will you use the joint election?
- Has a PST clearance certificate been requested?
- Is the transfer between related people? If so, tax liability can follow the property: a transferee and transferor can be jointly liable for the transferor's tax up to the excess of fair market value over what was paid.
If property is transferred to a spouse or common-law partner under a court order or written separation agreement after a relationship breakdown, special rules apply.
What to do next
- Ask the seller for the structure they have in mind and who owns the land.
- Order a title search on the property before you commit.
- Make your offer conditional on satisfactory due diligence on both the business and the land.
- Ask an accountant to review GST, PST and income tax effects.
- Have a lawyer review how the business agreement and the land transfer fit together.
Frequently asked questions
Can one agreement cover both the business and the building?
A combined agreement is possible in many deals, but the land still needs to be transferred and registered, and it is taxed differently from the business assets. Many buyers have a lawyer set out the land side clearly. How it should be structured depends on your deal.
How is property transfer tax calculated?
It is 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, based on value on the day of registration at the Land Title Office.
Do I pay PST on the building?
PST does not apply to real property, goodwill, inventory or accounts receivable, but it can apply to equipment and similar assets in an asset sale.
Do I need a PST clearance certificate?
A buyer of a business should obtain one, because otherwise the buyer is liable for an amount equal to any outstanding amount owed by the collector.
Sources
- Province of British Columbia – Buying and selling a business (PST) — www2.gov.bc.ca
- Excise Tax Act s. 167 — Justice Laws (federal)
- Income Tax Act s. 160 — Justice Laws (federal)
- Province of British Columbia – Property transfer tax — www2.gov.bc.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
This is a buying & selling a business question
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