- An indemnity clause, its limits and any holdback are mostly negotiated in the contract, so the exact wording matters.
- Some holdback-style rules do come from statute, including tax withholding on non-resident sellers and WSIB buyer liability.
- Whether you buy shares or assets changes which liabilities come with the business.
Closing a sale does not end the risk. A buyer may discover a debt, a tax problem or an unpaid employee claim months later. A seller may worry that the buyer will keep coming back for money long after the sale.
Indemnity clauses, caps, baskets and holdbacks are the tools a purchase agreement uses to share that risk. This article explains how they generally work in an Ontario deal and which protections come from law rather than from the contract.
What an indemnity clause does
An indemnity is a promise by one side to compensate the other for specified losses after closing. Usually the seller indemnifies the buyer if the seller's statements about the business turn out to be wrong, or if the seller breaks a promise in the agreement. Sometimes the buyer gives a smaller indemnity back to the seller.
The clause is only as useful as its wording. It should say which losses are covered, how a claim is made, who controls the defence of a claim brought by an outsider, and how long the right to claim lasts. Vague wording is a common source of disputes.
Caps, baskets and time limits
In private share and asset deals, these limits are generally set by the contract rather than by a statute. That means they are negotiated, and what is typical in one deal may not suit yours.
| Term | What it does | What to think about |
|---|---|---|
| Cap | Sets the most the indemnifying side can be required to pay | Whether it is tied to the price, and whether serious matters such as fraud sit outside it |
| Basket | Sets a minimum amount of loss before claims count | Whether it works as a deductible or as a threshold once crossed |
| Survival period | Sets how long claims can be made after closing | Whether tax, employment and title matters last longer than general statements |
| Claim procedure | Sets notice and response steps | Written notice, deadlines and who may settle a claim |
A seller usually wants a low cap, a meaningful basket and a short survival period. A buyer usually wants the reverse. Where you land often reflects how much the buyer was able to check before closing.
Holdbacks and escrow
A holdback means part of the price is kept back after closing to cover possible claims. In an escrow, a neutral third party, often a lawyer or trust company, holds that money under written instructions. Escrow gives the seller more comfort that the money is set aside and not simply kept by the buyer.
- How much is held back and for how long
- What events release the money, and who decides
- Whether claims are limited to the held amount or may go beyond it
- Whether interest is earned and who receives it
- What happens to money still disputed when the period ends
Holdbacks that the law requires or encourages
A few holdback-style rules do not depend on negotiation. If a non-resident sells taxable Canadian property, the buyer is liable to pay 25% of the amount by which its cost exceeds the certificate limit, due within 30 days after the end of the month of purchase unless a certificate of compliance has been issued. That is why agreements with non-resident sellers commonly provide for a holdback.
If no certificate of compliance is issued, the buyer may withhold 25% of the proceeds, or 50% on certain types of property, less any certificate limit. A buyer is not liable if, after reasonable inquiry, it had no reason to believe the seller was not resident in Canada. Unlisted shares can count as taxable Canadian property if, at any time in the previous 60 months, more than 50% of their value came from Canadian real property, resource property or timber resource property.
On the seller's side, a non-resident must notify the Minister by registered mail no later than 10 days after the sale unless a qualifying advance notice was already given. Whether this applies to your deal depends on the facts, so check early.
Liabilities that follow the business
Some risks pass to a buyer by law, whatever the indemnity says. When an employer sells all or part of its business, the buyer is liable for all amounts the seller owed under the Workplace Safety and Insurance Act immediately before the sale. A WSIB purchase certificate relieves the buyer of that liability up to the sale date, but the seller's account must be in good standing, the certificate is valid for 30 days from issue, and the seller must notify the WSIB within 10 days of the sale.
The certificate policy does not apply to buyers who acquire a business by merger, amalgamation or by acquiring share capital, because they take on the seller's liabilities by law. If only part of a business is bought and the buyer cannot give adequate proof of the value acquired, the WSIB pro-rates the seller's liability and charges the buyer that share.
Employees are another example. When a business is sold and an employee keeps working for the new owner, the employee's total time with the business counts for rights such as notice of termination, vacation and leaves. A buyer who wants protection for those costs often asks for an indemnity or a holdback.
What to do next
- Decide whether the deal is a share or asset purchase, since that changes which liabilities come with it
- List the risks you most worry about and match each to a clause, limit or holdback
- Ask whether the seller is a non-resident before you settle the price terms
- Confirm the seller's WSIB account status early if the deal involves assets
- Have the escrow instructions drafted at the same time as the main agreement
- Ask a lawyer to review the indemnity wording before you sign
Frequently asked questions
Is an indemnity cap required by Ontario law?
No statute sets caps or baskets for private business deals; they are negotiated in the contract. Because they are a matter of agreement, the exact wording and what falls outside the cap deserve close attention.
What is the difference between a holdback and an escrow?
A holdback means part of the price is kept back after closing, often by the buyer. In an escrow, a neutral third party holds the money under written instructions, which gives the seller more certainty it is set aside.
Do I need a holdback if the seller lives outside Canada?
It may be wise. A buyer of taxable Canadian property from a non-resident can be liable for 25% of the amount by which its cost exceeds the certificate limit unless a certificate of compliance has been issued. A buyer who reasonably believed the seller was resident is not liable.
Can a WSIB purchase certificate be used in a share purchase?
The purchase certificate policy does not apply where a business is acquired by buying share capital, because those buyers take on the seller's liabilities by law. The corporation stays the same, so its history stays with it.
Sources
- Ontario.ca – Your guide to the Employment Standards Act: Continuity of employment — ontario.ca
- Justice Laws – Income Tax Act, s. 116 — Justice Laws (federal)
- Canada Revenue Agency – Disposing of or acquiring certain Canadian property — canada.ca
- WSIB Operational Policy Manual – Purchase Certificates — wsib.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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