- Indemnities, caps, baskets, escrows and holdbacks are mostly contract terms that the buyer and seller negotiate, so the wording of your agreement matters.
- Some holdback-type rules do come from statute, including income tax withholding on purchases from non-resident sellers.
- Buyers of a business or part of a business can inherit the seller's WSIB debts unless they take the right steps before closing.
Closing a business sale does not end the risk. A buyer may later find a debt, a tax problem or a misstatement about the business. A seller may worry about being chased for years after the money has been spent.
Indemnities, escrows and holdbacks are the contract tools that decide who bears those risks and for how long. This article explains what each one does in plain terms, and points out the few places where Ontario or federal law sets rules you cannot simply negotiate around.
What post-closing protection is for
A purchase agreement usually contains statements by the seller about the business, such as that the books are accurate and that there are no hidden debts. If a statement turns out to be wrong, the buyer wants a way to be paid back. The seller wants that exposure to be limited and to end at some point.
Terms like caps, baskets, escrows and holdbacks are generally negotiated and written into the agreement itself. That means two similar deals can look very different, and you should read the actual clauses rather than assume a standard approach.
Indemnities, caps and baskets
An indemnity is a promise to compensate the other side for certain losses. It is usually given by the seller to the buyer, though buyers can also give indemnities, for example for how they run the business after closing.
| Term | What it generally does | Who it tends to help |
|---|---|---|
| Indemnity | Requires one side to pay for specified losses after closing | The side receiving the promise |
| Cap | Sets a ceiling on the total amount that can be claimed | The side giving the promise |
| Basket | Sets a minimum amount of loss before claims can be made, or before the first part is covered | The side giving the promise |
| Survival period | Sets how long claims can be brought after closing | Depends on how it is drafted |
Ask who is giving the indemnity, what it covers, whether some risks (such as tax or environmental problems) are treated differently, and whether the cap applies to every kind of claim. A promise is only as good as the seller's ability to pay it, which is why escrows and holdbacks exist.
Escrow and holdback: keeping money available
In a holdback, the buyer keeps back part of the purchase price and pays it later if no valid claims arise. In an escrow, part of the price is paid to a neutral third party who holds it under written instructions and releases it according to the agreement.
- How much is held back, and for how long.
- What events trigger release to the seller or payment to the buyer.
- How a disputed claim is handled while the money is held.
- Whether interest on the funds goes to the buyer or the seller.
- Who gives the instructions to the escrow holder, and what happens if the parties disagree.
For a seller, a holdback means waiting for part of the price. For a buyer, it means having a practical source of recovery without chasing the seller afterwards.
Holdbacks that come from the law
Two areas involve rules that apply whatever the contract says. The first is sales by non-residents of Canada. A buyer of taxable Canadian property from a non-resident 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. If no certificate is issued, the buyer is entitled to withhold 25% of the proceeds, or 50% on certain types of property, less any certificate limit. A buyer who made reasonable inquiry and had no reason to believe the seller was non-resident is not liable.
The second is WSIB. When an employer sells, leases, transfers or otherwise disposes of 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 the seller's 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.
There are exceptions. The purchase certificate policy does not apply to buyers who acquire a business by merger, amalgamation or by acquiring share capital where no assets are disposed of, because these buyers 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 relative to the whole, the WSIB pro-rates the seller's liability and charges the buyer that share.
What to do next
- Identify the risks you most want covered, such as tax, employee, lien or regulatory problems.
- Check whether the seller is resident in Canada and whether property is taxable Canadian property.
- Request a WSIB purchase certificate early enough that closing falls inside its validity window.
- Search for registered liens on used business assets before you pay.
- Have a lawyer review the indemnity, cap, basket, survival and escrow wording before you sign.
Because these terms are set by contract, a lawyer can explain how the draft wording would actually work if a claim arose.
Frequently asked questions
Is an escrow the same as a holdback?
Not quite. In a holdback the buyer itself keeps part of the price, while in an escrow a neutral third party holds the money. Both aim to keep funds available for possible post-closing claims, and the details come from your agreement.
Does Ontario law set the cap or basket for an indemnity?
These terms are generally negotiated in the contract. Your agreement will say what the amounts and time limits are, so the drafting deserves close attention.
Can a buyer be responsible for the seller's WSIB debts?
Yes. The buyer is liable for amounts the seller owed under the Act immediately before the sale. A purchase certificate can relieve the buyer of that liability up to the sale date, if the conditions are met.
When must a buyer withhold money from a non-resident seller?
Where the property is taxable Canadian property and no certificate of compliance has been issued, the buyer is entitled to withhold 25% of the proceeds, or 50% on certain types of property, less any certificate limit. A buyer who made reasonable inquiry and had no reason to believe the seller was non-resident is not liable.
Sources
- 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
- Ontario.ca – Register a security interest or search for a lien on Access Now — ontario.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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