Do You Inherit Debts When Buying Shares of a Saskatchewan Company?

When you buy the shares of a Saskatchewan corporation, the corporation itself stays in place and its existing tax cost base and history stay with it. The question most buyers ask early is whether the company's debts, lawsuits and tax problems come with it.

This article explains the difference between buying shares and buying assets, what you generally take on, and how the purchase agreement and your own investigation reduce the risk. Your deal will have its own facts, so treat this as a starting point for a conversation with a lawyer and an accountant.

This article covers the law of Saskatchewan.

Shares versus assets: what you are actually buying

In a share purchase you buy ownership of the corporation. The corporation itself stays in place, and you inherit its existing tax cost base and history. In an asset purchase you pick the items you want, such as equipment, inventory and goodwill, and leave the rest behind.

Tax treatment shows the difference. In a share purchase the tax values of the corporation's assets do not change, and you inherit the existing tax cost base and history. In an asset purchase the price is allocated to each asset at fair market value, then to inventory, with the balance to goodwill.

What generally comes with the company

In a share purchase you inherit the corporation's tax cost base and history. Beyond tax, what else may affect you depends on the facts of your deal, so it is worth having a lawyer review the company's contracts and records before you sign.

• Tax history: you inherit the corporation's existing tax cost base and history.
• Employees: where a business is sold, leased or transferred and an employee keeps working there, their service is maintained for notice purposes, and this applies whether the deal is an asset or share sale.
• Secured debts: a lender may have registered a security interest against the company's equipment or inventory, which you can look for in the Saskatchewan Personal Property Registry (SPPR).
• Contracts and leases: how existing agreements apply after a share purchase depends on their wording, so it is worth having a lawyer review their terms, renewal dates and any change-of-control clauses.

Employee notice shows how this works in practice. Notice or pay in lieu is owed only to employees employed for more than 13 consecutive weeks, and common law may entitle long-term employees to more than the statutory minimum. A seller's staff do not reset to zero when you buy the shares.

Why sellers often prefer a share sale

Understanding the seller's motivation helps you negotiate. Individuals selling qualified small business corporation (QSBC) shares may be able to claim the lifetime capital gains exemption, which makes a share sale attractive to a seller. A seller of assets from a corporation cannot claim it on the corporation's own gain.

To qualify, a share must generally have been held for at least 24 months by the individual, a spouse or common-law partner, or a related partnership. It must have been a share of a Canadian-controlled private corporation throughout, and more than 50% of the corporation's asset value must have been used mainly in an active business carried on primarily in Canada. The dollar limits change over time, so confirm the current figure with an accountant.

How due diligence, warranties and indemnities protect you

You cannot spot everything by reading documents, so the purchase agreement does much of the protecting. These tools work together.

• Due diligence: review the corporation's financial statements, tax filings, contracts, leases, employment records and any claims before you commit.
• Registry searches: search the SPPR by debtor name or by serial number of goods to find registered liens.
• Warranties: the seller states that certain facts are true, such as the accounts being accurate and no undisclosed claims existing.
• Indemnities: the seller agrees to repay you if a listed problem turns up after closing.
• Holdbacks or escrow: part of the price is set aside for a period so there is money available if a claim arises.

A warranty or indemnity is only as good as the seller's ability to pay it. The agreement should say how long the protection lasts, any limits on the amount, and how a claim is made. These terms are negotiated, so there is no standard answer.

What to do next

• Ask the seller for financial statements, tax filings, contracts, leases and a list of employees and their start dates.
• Search the SPPR for registrations against the corporation.
• Ask whether any claims, disputes or tax audits are open or threatened.
• Have a lawyer draft or review the warranties, indemnities and any holdback.
• Ask an accountant to compare a share purchase with an asset purchase for your situation.

Frequently asked questions