Who Is Liable for Hidden Debts When Buying a Business in Ontario?

When you buy a business, you are not only buying its good will and equipment. You may also be buying its history: unpaid taxes, claims by employees, debts to lenders and disputes nobody has mentioned yet. The question is which of those become your problem.

The structure of the deal matters a great deal. This article compares share and asset purchases in Ontario, points out the exceptions that catch buyers by surprise, and lists practical protections. It is general information, and a lawyer should review the actual deal.

Shares versus assets: what you step into

In a share purchase, you buy the corporation itself. It is the same legal entity with the same past, so its debts, claims and tax problems stay with it, and you now own it. In an asset purchase, you choose the assets you want and the obligations you agree to take, which is why buyers often see it as the safer route.

Asset purchases are not a complete shield, though. Some liabilities attach to the buyer by law, and a few tax rules can reach buyers in certain situations. The sections below cover the main ones.

Tax arrears and payroll deductions

If a corporation fails to remit payroll source deductions, the directors at the time are jointly and severally liable with the corporation. In a share purchase, that liability stays with the corporation as it was. That means you inherit the corporation's exposure, even though the former directors may also be liable. A director is not liable if they exercised the care, diligence and skill a reasonably prudent person would have used to prevent the failure, and CRA cannot start an action more than two years after the person last ceased to be a director.

A separate rule deals with property transferred from a tax debtor, and it is not limited to asset purchases, so it is worth checking in any deal. Anyone who receives property from a tax debtor is jointly and severally liable for the debtor's tax up to the amount by which the property's fair market value exceeds the consideration paid. This applies to the debtor's spouse or common-law partner, a person under 18, or a non-arm's length person. If you are an arm's length buyer who pays full fair market value, you have no liability under that rule. The rule reaches only spouses or common-law partners, persons under 18 and non-arm's length transferees, so whether it affects you depends on who is involved and what you pay.

If the seller is not a resident of Canada, a buyer of taxable Canadian property must pay tax on the seller's behalf: 25% of the cost (less any certificate limit), due within 30 days after the end of the month of the purchase, and the buyer may withhold it from the price. You are not liable if, after reasonable inquiry, you had no reason to believe the seller was not resident in Canada, or if CRA has issued a certificate for the property.

WSIB arrears

In an asset purchase, a person who acquires all or part of an employer's business is liable for all amounts the employer owed under the Workplace Safety and Insurance Act immediately before the disposition. This is a real exception to the idea that asset buyers leave debts behind.

The protection is a WSIB purchase certificate. If the seller's account is in good standing, the WSIB will issue one on request, and it waives the buyer's liability. It is valid for 30 days from its issue date, a separate certificate is needed for each account, and the date of disposal is the date of possession.

There are limits. The WSIB does not issue certificates for share acquisitions where no assets are disposed, mergers or amalgamations, sales by trustees in bankruptcy, receivers or liquidators, or CCAA arrangements, and it will not process a request while the seller's account has an issue under appeal. In share acquisitions and amalgamations, the acquirer takes on the seller's liabilities by law.

Employees and tax losses

Under Ontario's Employment Standards Act, 2000, if a business is sold or transferred and an employee keeps working for the new owner, the employment is not ended. Their length of employment with the seller flows through to you for vacation, notice and severance. Prior service does not carry over if the employee is rehired more than 13 weeks after the earlier of their last day with the seller or the day of the sale. The continuity rule also applies when only part of a business is sold, and the employee's total time with the business counts.

Share purchases also affect the corporation's tax attributes. An acquisition of control is a loss restriction event, and the corporation's taxation year is deemed to end immediately before it. Net capital losses from earlier years cannot be deducted afterwards. Business losses can still be deducted only if that business is carried on for profit or with a reasonable expectation of profit.

Protections and next steps

No search finds everything, so buyers layer their protections. Ontario's Personal Property Security Registration system can be searched online through ServiceOntario's Access Now to check for registered security interests against a seller's personal property, but it does not cover real property. Real property needs its own title search.

• Run lien searches on the seller and the corporation, and a separate title search on any land.
• Request a WSIB purchase certificate before closing an asset deal, keeping the 30-day window in mind.
• Ask for proof that payroll remittances and tax filings are up to date.
• Negotiate written promises from the seller (representations and indemnities) and consider holding back part of the price.
• Check whether the seller is a resident of Canada.
• Have a lawyer and accountant review the structure before you sign.

Frequently asked questions