Tax Clearance Certificates When Buying a Business in Ontario

If you are buying a business, you may worry that the seller's unpaid taxes will become your problem after closing. Searching for a tax clearance certificate is a sensible instinct, but in Ontario the term covers several different documents and rules, and not all of them apply to every deal.

This article explains the main checks and certificates that come up, how they differ between an asset purchase and a share purchase, and the special cases where a buyer can inherit a seller's debts. A lawyer or accountant can confirm which apply to your deal.

Why there is no single clearance certificate

Many buyers expect a government office to issue one certificate that says the seller owes nothing. Ontario does not work that way. Different agencies deal with different debts, and each has its own rule about buyer liability.

Older materials often tell buyers to follow bulk sales procedures. Ontario's Bulk Sales Act, R.S.O. 1990, c. B.14 was repealed on March 22, 2017, and buyers of business assets no longer have to comply with bulk sales procedures. Pages that still say otherwise are out of date.

Asset purchase or share purchase

The structure of the deal changes your exposure. In a share purchase, the corporation stays the same legal entity. The WSIB says no new legal entity is created, so no purchase certificate is required, and the corporation's WSIB account, including any amounts owing, stays with the corporation. The CRA also says a change in share ownership does not affect the tax values of the corporation's assets.

In other words, if you buy shares you take the company as it is, debts included. That makes searches and written protections in the purchase agreement especially important. In an asset purchase, the buyer may need a new business number and its own payroll and GST/HST accounts.

The WSIB purchase certificate

When an employer sells, leases, transfers or otherwise disposes of all or part of its business, the buyer is liable for all amounts the employer owed under the Workplace Safety and Insurance Act, 1997 immediately before the disposition. A buyer in an asset purchase should get a purchase certificate.

• The request must be made before the date of sale.
• The certificate is valid for 30 days from its issue date.
• Without a valid certificate, the WSIB may hold the buyer liable for all amounts the seller owed up to the date of sale.
• The WSIB issues a certificate only if the seller's account is in good standing: amounts owing paid, reconciliation forms filed and premiums reported for all past periods.
• No certificate can be issued while an issue on the account is under appeal.

There is an exception for certain insolvency buyers. Trustees in bankruptcy, court-appointed receivers or receiver-managers, certain liquidators and persons acquiring a business under the Companies' Creditors Arrangement Act are excluded from the buyer liability in s. 146. Do not confuse this certificate with the WSIB clearance certificate used when hiring contractors, which is a different document.

Other tax exposure to check

Retail Sales Tax Act s. 6 still applies to a sale in bulk by a person who holds, or must hold, a vendor permit. The seller must first obtain a certificate from the Minister showing that the listed taxes are paid, and a buyer who does not get the duplicate certificate is responsible to the Minister for the seller's unpaid taxes, penalties and interest.

For GST/HST, a buyer who acquires all or substantially all (at least 90%) of the property needed to carry on the business can jointly elect with the seller on Form GST44 so that no GST/HST is payable on the sale. The form must be filed on or before the day the buyer's GST/HST return is due for the first reporting period in which GST/HST would otherwise have been payable. The election cannot be used if the seller is a registrant and the buyer is not, and GST/HST can still apply to some items, such as services the seller supplies and leased property.

Two special cases can create buyer liability for the seller's debts. First, if property comes from a spouse or common-law partner, a person under 18 or anyone not dealing at arm's length, the recipient can be jointly liable for the transferor's income tax debts, up to a cap. A similar rule applies to unpaid GST/HST. For separated spouses transferring under a court order, judgment or written separation agreement, the property's fair market value is deemed nil for the GST/HST rule.

Second, if the seller is a non-resident selling taxable Canadian property and the CRA has not issued a clearance certificate, the buyer must remit 25% of the amount by which its cost exceeds the certificate limit, within 30 days after the end of the month of acquisition. A buyer is not liable if, after reasonable inquiry, it had no reason to believe the seller was non-resident, or if the property is treaty-protected or a s. 116(4) certificate was issued.

What to do next

• Decide with your lawyer and accountant whether you are buying assets or shares.
• Ask the seller early whether it holds, or must hold, a retail sales tax vendor permit.
• For an asset purchase, request the WSIB purchase certificate before the sale date and note its 30-day validity.
• Ask whether you and the seller will file Form GST44 and who will file it.
• Tell your lawyer if the seller is a relative, a spouse or common-law partner, or a non-resident.
• Ask for protections in the purchase agreement, such as promises about taxes and a way to deal with unpaid amounts, and confirm what suits your deal.

Because the rules depend on the structure and the people involved, speak with a lawyer or accountant before you sign or pay a deposit.

Frequently asked questions