- A letter of intent (LOI) sets out the main deal terms before the full agreement, and which parts bind you depends on its wording.
- The structure the LOI chooses, shares or assets, changes your tax and GST/HST position.
- Confidentiality terms matter because a buyer may only see employee and customer information under a proper agreement.
You have an offer on your business, and the buyer has sent a letter of intent. It looks friendly and short, but it usually sets the frame for everything that follows, including price, structure and the timetable.
This article explains what an LOI normally covers, how to tell which terms are meant to bind, and what exclusivity and confidentiality clauses mean for you. It is general information, not advice on your own document.
What a letter of intent is for
An LOI is a document that records the main terms a buyer proposes before anyone writes the full purchase agreement. It lets both sides test whether a deal is realistic before spending money on lawyers, accountants and due diligence.
It is not the final contract. Most of the detailed protection, such as representations, warranties and indemnities, is negotiated later in the purchase agreement. That is why the LOI is the best time to push on the big points, because they are hard to reopen later.
What it usually covers
- The price and how it is paid, including any amount held back or paid later
- Whether the buyer is buying your shares or the business assets
- What the buyer expects you to do after closing, such as staying on for a transition
- Conditions the buyer wants met, including financing and due diligence
- A target closing date and a timetable
- Exclusivity and confidentiality terms
Check each item against what you actually discussed. Vague wording on price adjustments or on what is included in the sale is a common source of disagreement later.
Shares or assets: why the structure matters to you
The LOI often fixes whether this is a share sale or an asset sale. The choice affects your tax. An individual who sells qualified small business corporation shares may be able to claim the lifetime capital gains exemption, which is $1,250,000 for 2025, giving a maximum deduction of $625,000. The shares must meet tests, including a 24-month ownership test and an asset-use test.
When the corporation itself sells its business assets, the gain belongs to the corporation, and that share-based exemption does not apply to it directly. In an asset sale, the parties may also jointly elect so that no GST/HST is payable on the transfer, if the buyer acquires all or substantially all of the property reasonably needed to carry on the business. Ask your accountant to model both structures before you sign.
Which terms bind and which do not
Many LOIs say they are non-binding on price and structure but binding on a few specific clauses. Typically those are confidentiality, exclusivity and sometimes who pays costs. Whether a particular term binds you turns on the exact wording and the facts, so read for phrases such as 'subject to contract' or 'this section is binding'.
| Clause | What it means in plain words |
|---|---|
| Exclusivity (no-shop) | You agree not to negotiate with other buyers for a set period |
| Confidentiality | Both sides agree to keep the deal and the information shared private |
| Conditions | The buyer's obligation to proceed depends on items like due diligence or financing |
| Governing terms | Which parts are binding and which are only a statement of intent |
Exclusivity deserves attention. While you are locked in, you cannot use a competing offer as leverage. Think about how long the period runs, what happens if the buyer changes the price, and whether it ends automatically.
Confidentiality and sharing information
A buyer will want to see employee and customer records. Under PIPEDA, organizations may use and disclose personal information without consent for a prospective business transaction, but the parties must agree that the recipient will use it only for the transaction, protect it with appropriate safeguards, and return or destroy it within a reasonable time if the deal does not proceed. The information also has to be necessary to decide whether to proceed.
So the confidentiality clause should be more than a promise of silence. It should match those requirements. Note that this exemption does not apply where the primary purpose or result of the deal is buying or selling personal information itself.
What to do next
- Do not sign until you know which terms are binding
- Ask your accountant to compare share and asset structures
- Check the exclusivity period, and what ends it
- Make sure the confidentiality clause covers how personal information is handled
- Have a lawyer review the LOI before you sign, since it shapes the later agreement
Frequently asked questions
Is a letter of intent legally binding?
It depends on how it is written. Many LOIs make only some clauses binding, often confidentiality and exclusivity, while price and structure stay open. A lawyer can read your document and tell you which terms are likely to bind you.
What does exclusivity mean in an LOI?
It means you agree not to negotiate with, or solicit offers from, other buyers for a stated period. Check the length, whether it can be extended automatically, and what happens if the buyer lowers the price.
Can the buyer see my employee records before closing?
Possibly, but only under a proper agreement. The parties must agree the information will be used only for the transaction, safeguarded, and returned or destroyed if the deal fails, and it must be necessary to decide whether to proceed.
Should I get advice before signing an LOI?
Yes, it is wise. Choices about structure, payment terms and exclusivity can affect your tax and your leverage, and they are hard to change once the LOI is signed.
Sources
- CRA Guide T4037, Capital Gains — canada.ca
- Income Tax Act, s. 110.6 — Justice Laws (federal)
- Excise Tax Act, s. 167 — Justice Laws (federal)
- Personal Information Protection and Electronic Documents Act, s. 7.2(1) — Justice Laws (federal)
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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