Checking for Liens and Hidden Debts Before Buying a Business in Ontario

If you are worried about inheriting the seller's debts, you are asking the right question. A business can look healthy on the surface while carrying secured loans, unpaid premiums or tax debts that surface after closing.

This article explains how the main searches and certificates work in Ontario and how to make sure creditors' claims are dealt with at closing. Which ones you need depends on whether you are buying assets or shares.

Why debts can follow a business purchase

Lenders often take security over equipment, inventory and receivables. A customer buying a product in the ordinary course takes it free of the seller's security interest, but a purchase of a business's assets outside the ordinary course does not get that protection, which is why a PPSR search and lien discharges matter.

Share purchases work differently. Because you are buying the corporation itself, the corporation keeps all its own tax, WSIB and creditor liabilities. The WSIB confirms that the corporation's account, including any amounts owing, stays with the corporation. You inherit those debts indirectly, so the purchase agreement and your searches become your main safeguards.

Ontario's Bulk Sales Act, which once required special procedures for asset buyers, was repealed on March 22, 2017, and buyers of business assets no longer have to comply with bulk sales procedures. The searches described below are practical steps you can take to protect yourself.

PPSR searches: finding security interests

Ontario's Personal Property Security Registration (PPSR) is a public database of registrations under the Personal Property Security Act and the Repair and Storage Liens Act. Enquiries can be run against an individual debtor, a business debtor or a motor vehicle, one transaction at a time. It does not cover real property.

• Search the exact legal name of the selling corporation or individual, and any other names the business has used.
• Search the sole proprietor personally if the business is not incorporated.
• Search motor vehicles separately if vehicles are part of the sale.
• For each registration, ask the seller to arrange a discharge or confirm it will be paid out and discharged at closing.

An unperfected security interest in goods is not effective against a transferee who gives value and receives delivery without knowledge of the security interest. Do not rely on that, though. Knowledge defeats the protection, and you will have just searched, so the safer path is to clear every claim you find.

Execution searches and business registry checks

A writ of execution is how a judgment creditor enforces a court judgment, and it is searched through the sheriff's enforcement office. Procedures and search fees vary by county, so confirm the current process with the enforcement office for the area where the seller operates.

The Ontario Business Registry is also useful. Anyone can search it for free for basic information about a business, while ordered products cost $8 for a profile report, $3 for document copies and $26 for a certificate of status, and intermediaries may charge extra service fees. These searches are a practical way to check basic details about the seller's business, and a lawyer can confirm what else is worth reviewing in your deal.

WSIB purchase certificates

Under the Workplace Safety and Insurance Act, 1997, when an employer sells or otherwise disposes of all or part of its business, the buyer is liable for all amounts the employer owed under the Act immediately before the disposition. A buyer without a valid purchase certificate is liable for amounts related to the business acquired, to the date of disposal.

The WSIB says asset buyers should get a purchase certificate. The request must be made before the date of sale, and the certificate is valid for 30 days from its issue date. It is issued only if the seller's account is in good standing: all amounts owing paid when requested, reconciliation forms filed, and premiums reported for all past periods. No certificate can be issued while an issue on the account is under appeal.

There are exceptions. A share purchase does not need a purchase certificate, and the parties submit the Share Purchase Agreement instead. Buyer liability also excludes trustees in bankruptcy, court-appointed receivers and receiver-managers, certain liquidators, and persons acquiring a business under the Companies' Creditors Arrangement Act.

Tax debts and non-residents

The Retail Sales Tax Act s. 6 still applies to a sale in bulk by a person who holds, or must hold, a vendor permit under s. 5, and the seller must first get a certificate from the Minister showing the listed taxes are paid. A buyer who does not get the duplicate certificate from the seller is responsible to the Minister for the seller's unpaid taxes, penalties and interest.

Transfers between non-arm's-length people carry special risk. A person who receives property from a spouse or common-law partner, a person under 18, or anyone not dealing at arm's length is jointly and severally liable with the transferor for the transferor's tax debts, up to a cap. A similar rule applies to unpaid GST/HST. For transfers between separated spouses under a court order, judgment or written separation agreement, the property's fair market value is deemed nil for the GST/HST rule.

If the seller is a non-resident selling taxable Canadian property and the CRA has not issued a clearance certificate, the buyer must remit 25% of the amount by which its cost exceeds the certificate limit within 30 days after the end of the month of acquisition. A buyer is not liable under that rule if, after reasonable inquiry, it had no reason to believe the seller was not resident in Canada, if the property is treaty-protected, or if a s. 116(4) certificate was issued.

Clearing claims at closing

• Order PPSR searches early and again shortly before closing, because new registrations can appear.
• Get written payout statements from each secured lender and have discharges delivered at closing.
• Request the WSIB purchase certificate before the sale date and check that it is still valid on closing day.
• Have the agreement require the seller to pay creditors from the proceeds, or direct payment to lenders on the closing statement.
• Add warranties that there are no undisclosed debts, plus an indemnity and, where suitable, a holdback.
• Ask your accountant about CRA clearances and the tax risks that fit your deal.

Frequently asked questions