- A holdback or escrow keeps part of the price back after closing, and the purchase agreement should say how much, for how long and on what terms it is released.
- Buyers often want this protection because they can inherit certain obligations, such as a PST liability if they do not obtain a clearance certificate.
- Sellers paid over time should ask an accountant how the timing affects tax, because a capital gains reserve can spread the gain in some cases.
When you buy or sell a business, the whole price is not always paid on closing day. Part of it may be held back for a period, or placed with a neutral third party. The buyer wants comfort that problems will be covered. The seller wants to be paid.
This article explains the basic idea, why buyers ask for it and what the agreement should spell out. The exact terms are negotiated deal by deal, so the points here are things to ask about, not fixed rules.
This article covers the law of British Columbia.
Holdback and escrow in plain words
A holdback is an amount the buyer keeps back from the price at closing and pays later, if the agreed conditions are met. An escrow is similar, but the money is held by a neutral third party, such as a lawyer or other escrow agent, under written instructions. The practical difference is who has control of the funds while they wait.
Both are tools for managing risk after the deal closes. Whether a holdback or escrow applies to your deal depends on your situation and on what the parties agree, so it is worth confirming with a lawyer.
Why buyers ask for one
A buyer cannot see everything about a business before closing. Money held back gives the buyer something to recover against if a problem turns up. Some examples where the law can put an obligation on a buyer:
- PST: a buyer of a business, or of goods, software or an interest in a business in a bulk transaction, should obtain a PST clearance certificate, and if they do not, they are liable for an amount equal to any outstanding amount owed by the collector.
- Employees: in a sale of all or part of a business, employment is deemed continuous, and the purchaser pays outstanding wages, including wages due before the sale, and assumes accrued vacation pay, but in a bankruptcy a trustee's sale can end the employees' rights under the Act, and the purchaser is not liable for wages owed before the bankruptcy.
- Related-party transfers: when property is transferred to a spouse, common-law partner, a person under 18 or a person not dealing at arm's length, the two can be jointly liable for the transferor's tax up to the excess of fair market value over what was paid.
A holdback does not replace those steps. For example, a buyer can apply for a PST clearance certificate with the collector's consent, either online or using form FIN 447. The holdback is a back-up for what the checks miss.
What a seller should think about
For a seller, money held back is money you do not have yet. Ask how much is held, how long, and what exactly allows the buyer to keep it. Vague wording about any loss at all is much riskier for you than a list of specific, defined claims.
Tax timing also matters. A capital gains reserve lets a seller who is paid over time spread the gain. Most reserves can be claimed over a maximum of four years, so the gain is included over five years, and a nine-year period applies in some cases, such as certain transfers to children and some qualifying business transfers. Whether that fits a holdback depends on the facts, so ask an accountant.
What the agreement should spell out
- The amount held and how it is calculated.
- Who holds it: the buyer, or a neutral escrow agent.
- The release date or dates, and what happens if one is missed.
- What kinds of claims can be made against the funds, and any minimum or maximum.
- How a claim is made: written notice, what detail is needed and how fast.
- How a disagreement is resolved, and whether the disputed part stays held while the rest is released.
- Whether the funds earn interest and who gets it.
If the agreement does not answer these points, a disagreement later is harder to settle. Clear steps and dates protect both sides.
What to do next
- Ask early whether a holdback or escrow is expected, and in what amount.
- Have a lawyer draft or review the holdback and release terms with the rest of the purchase agreement.
- Ask an accountant how payment timing affects tax for the seller and the buyer.
- Buyers: obtain a PST clearance certificate when buying a business, or goods, software or an interest in a business in a bulk transaction, because a purchaser who does not is liable for an amount equal to any outstanding amount owed by the collector.
Frequently asked questions
Is a holdback the same as a deposit?
No. A deposit is paid before closing and usually counts toward the price. A holdback is part of the price kept back after closing to cover possible claims. Your agreement should say which one applies and how each is handled.
How long are funds usually held?
It depends on what the parties negotiate. The period often reflects how long problems might take to appear. Whatever is agreed, the agreement should state it clearly, along with what happens to any claim made before the date.
What if the buyer and seller disagree about a claim?
The agreement should say how a dispute is handled. Without clear terms, funds can stay tied up until the parties agree or a lawyer helps resolve it. It is much easier to set the process before closing.
Does a holdback affect the seller's taxes?
It can, depending on how and when the seller is paid. A capital gains reserve can spread the gain for a seller paid over time, with limits on how many years it can run. An accountant can tell you how it applies to your deal.
Sources
- CRA – T4037 Capital Gains — canada.ca
- Employment Standards Act, RSBC 1996, c. 113 — bclaws.gov.bc.ca
- BC Employment Standards Branch – Interpretation Guidelines, s. 97 — www2.gov.bc.ca
- Province of British Columbia – Buying and selling a business (PST) — www2.gov.bc.ca
- Income Tax Act s. 160 — Justice Laws (federal)
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
Buying or selling a business with us is from $3,358.88, tax included. Third-party fees are extra.