Liabilities You Inherit in an Ontario Share Purchase

Buying the shares of a company is different from buying its business. The company does not change, so its debts, claims and obligations stay with it, and you now own the company that carries them.

This article walks through the main liabilities a buyer should think about in an Ontario share purchase and how contract terms and investigation reduce the risk. It is general information, and the details of your target company matter.

Why liabilities stay with the company

A company is a separate legal person. When its shares change hands, the company remains the same party to its contracts, loans, leases and lawsuits. Directors' liability for unremitted payroll deductions, for example, stays with the corporation as it was in a share purchase. The WSIB likewise treats acquirers in share acquisitions and amalgamations as taking on the seller's liabilities by law.

That is the key trade-off. A share purchase can be simpler because contracts and permits generally stay in place, but you cannot pick and choose which liabilities to leave behind.

Tax and payroll exposure

• Deemed year end: when a corporation has a loss restriction event, such as an acquisition of control, its taxation year is deemed to end immediately before that time and a new year begins.
• Lost capital losses: net capital losses from years that ended before the event cannot be deducted in later years.
• Business losses: these can still be deducted after the acquisition of control, but only if that business is carried on for profit or with a reasonable expectation of profit.
• Payroll source deductions: the directors at the time the corporation fails to remit are jointly and severally liable with it, and the liability stays with the corporation in a share purchase.

If you will become a director after closing, note that a director is not liable if they exercised the care, diligence and skill a reasonably prudent person would have used to prevent the failure. CRA also cannot start an action more than two years after a person last ceased to be a director. Both points matter for outgoing directors and for you as an incoming one.

Workplace Safety and Insurance Board and employee obligations

The WSIB does not issue purchase certificates for share capital acquisitions where no assets are disposed. That means the clearance tool available in asset deals is not available to you here, so a buyer typically relies on due diligence on the company's WSIB account and on contract protection.

Employees usually do not change employers in a share purchase, because the company that employs them is unchanged. If a business is sold or transferred in any other way and an employee keeps working for the new owner, the employment is not ended and the employee's length of employment carries through for vacation, notice and severance. Either way, assume the company's existing employment obligations come with it.

Real property and searches

The Ministry of Finance says a transfer of shares of a corporation that holds land in its own right does not ordinarily attract land transfer tax, because the corporation's property belongs to the corporation and not to its shareholders. There are exceptions. Where shares carry a right to exclusive occupation of a unit, as in an equity co-operative, the disposition is taxable under s. 3 of the Land Transfer Tax Act, and a share transfer involving a corporation that holds only legal title as trustee may also be a taxable change in beneficial ownership.

Ontario's Personal Property Security Registration system can be searched online through ServiceOntario's Access Now to check for registered security interests against personal property, but it does not cover real property. Land records, litigation and tax status need separate checks.

Protecting yourself and what to do next

The share purchase agreement is where risk is allocated. Representations and warranties are the seller's statements about the company, such as that taxes are paid and there are no undisclosed claims. An indemnity is the seller's promise to cover you if those statements are wrong. A holdback keeps part of the price in reserve for a period so there is money to claim against. Some contracts also have change-of-control clauses that may need a counterparty's consent even though the company stays the same.

• Ask for tax filings, payroll remittance records and WSIB account status.
• Run lien searches and ask a lawyer to check litigation and title.
• Review contracts and leases for change-of-control provisions.
• Negotiate warranties, an indemnity and possibly a holdback.
• Ask your accountant how the deemed year end and loss restrictions affect the company.

Frequently asked questions