Hidden Debts and Tax Liability When Buying a Business in Ontario

When you buy a business, you want the customers, equipment and goodwill, not the seller's unpaid bills. Some debts can follow the business, and others are hard to spot until after closing.

The risk looks different depending on how the deal is built. Below are the main places hidden debts show up in Ontario, the searches and certificates that help, and where an indemnity fits in.

Asset purchase or share purchase: it changes the risk

In an asset purchase you buy the business's equipment, inventory, contracts and goodwill. In a share purchase you buy the shares of the corporation that owns the business. That difference matters for debts.

In a share purchase, the corporation stays the same legal entity. The WSIB, for example, says no new entity is created, so no purchase certificate is needed, and the corporation's account, including any amounts owing, stays with the corporation. That means you take the company along with whatever it owes. The CRA also notes that a change in share 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 do not take over the seller's company, but certain laws can still attach the seller's debts to you. A buyer of assets may also need a new business number and its own payroll and GST/HST accounts.

Statutory exposures for asset buyers

As noted above, the Bulk Sales Act no longer applies, so older guides telling you to follow bulk sales procedures are out of date. Other rules still apply, though.

• WSIB: when an employer sells or otherwise disposes of all or part of its business, the buyer is liable for amounts the employer owed under the Act immediately before the sale. Buyers in an asset purchase should get a purchase certificate, requested before the date of sale, which is valid for 30 days from issue. Without a valid one, the WSIB may hold you liable for everything the seller owed up to the date of sale. This buyer liability does not extend to trustees in bankruptcy, court-appointed receivers or receiver-managers, liquidators under the Winding-Up and Restructuring Act, or persons acquiring a business under the Companies' Creditors Arrangement Act.
• Retail Sales Tax: the Retail Sales Tax Act still applies to a bulk sale by someone who holds, or must hold, a vendor permit. The seller must first get a certificate from the Minister, and a buyer who does not get the duplicate certificate is responsible to the Minister for the seller's unpaid taxes, penalties and interest.
• Non-resident sellers: if the seller is not resident in Canada and the property is taxable Canadian property, and no CRA clearance certificate has been issued, 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 WSIB purchase certificate is issued only if the seller's account is in good standing, with all amounts paid, reconciliation forms filed and premiums reported, and none can be issued while an issue on the account is under appeal. Ask the seller early about their WSIB account. A buyer is not liable under the non-resident rule if, after reasonable inquiry, it had no reason to believe the seller was non-resident, or if the property is treaty-protected or a certificate was issued.

Family and related-party deals

Buying from a spouse, common-law partner, a person under 18, or anyone you do not deal with at arm's length carries a different risk. Under the Income Tax Act, you can become jointly and severally liable with the seller for their tax debts, up to a cap tied to the property's fair market value less what you paid, and the transferor's tax owing. The Excise Tax Act has a similar rule for unpaid GST/HST.

One exception: for transfers between separated spouses or common-law partners under a court order, judgment or written separation agreement, the property's fair market value is deemed nil for the GST/HST rule. Arm's-length buyers are generally outside these rules, but a lawyer can confirm how they apply to your situation.

Searches and tax elections that help

• Personal Property Security Registration (PPSR): this public database lets you search a business debtor or an individual debtor, one transaction at a time, but it does not cover real property. A purchase of business assets outside the ordinary course does not get the protection ordinary customers get, so a search and lien discharges matter. An unperfected security interest may not be effective against a buyer who gives value and takes delivery without knowing about it.
• Ontario Business Registry: anyone can search it free for basic information about a business.
• GST44 election: if you buy all or substantially all (at least 90%) of the property needed to run the business, you and the seller can jointly elect on Form GST44 so no GST/HST is payable on the sale, as long as you can continue operating with the property acquired. It is due on or before the day your GST/HST return is due for the first period in which tax would otherwise have been payable. It cannot be used if the seller is a registrant and you are not, and GST/HST still applies to some items such as services and leased property.
• Price allocation: if the agreement sets reasonable prices for individual assets, you can use them for capital cost allowance. If not, you must allocate the price among assets, inventory and goodwill, and the amounts should match what the seller reported.

Judgment and execution searches against the seller are also worth discussing with your lawyer.

Indemnities, holdbacks and next steps

Even with every search done, some debts surface later. An indemnity is the seller's written promise to cover you if a pre-closing debt or tax bill lands on you. It is only as good as the seller's ability to pay, so buyers often pair it with a holdback, where part of the price is kept back for a period.

• Decide early whether the deal is an asset or share purchase.
• Ask the seller for recent CRA, payroll, HST and WSIB statements.
• Request the WSIB purchase certificate before the sale date if buying assets.
• Run PPSR searches and arrange discharges for any liens.
• Ask whether the GST44 election is available and who files it.
• Negotiate an indemnity, with a holdback if possible.
• Have a lawyer and accountant review the agreement before you sign.

Frequently asked questions