Vendor Take-Back Loans When Selling a Business in Ontario

Many buyers cannot pay the full price on closing day. A common answer is a vendor take-back: you, as the seller, accept part of the price later, usually as a loan to the buyer with interest and a repayment schedule.

This can help a deal close, but it also makes you a lender. This article explains the tax treatment, how sellers in Ontario secure the debt, and what can go wrong if the buyer stops paying. Your own deal may differ, so a lawyer and an accountant should review the details.

How a vendor take-back works

In a vendor take-back, part of the purchase price is not paid at closing. The buyer signs a promise to pay it over time, and the seller usually asks for security so the promise is backed by something. The terms (amount, interest, payment dates, what happens on default) are set out in the sale agreement and in separate loan and security documents.

The type of sale matters. In an asset sale the corporation sells its business assets, and the gain belongs to the corporation rather than to you personally. In a share sale you sell your shares. The security you can take and the tax result both depend on which structure you use.

Tax: spreading the gain with a reserve

Where part of the price is not payable until after the end of the tax year, a seller may claim a reasonable capital gains reserve under Income Tax Act s. 40(1)(a)(iii). The reserve is limited so that at least 1/5 of the gain is included in income each year.

The usual maximum reserve period is four years, so the whole gain is taxed over no more than five years.

There is an exception for sales to your child. When qualified small business corporation shares (or family farm or fishing property) are sold to your child who was resident in Canada immediately before the sale, the figures become 1/10 and 9, so the gain can be spread over up to 10 years.

If you are selling qualifying shares, you may also be able to claim the lifetime capital gains exemption, which is $1,250,000 for 2025. How the exemption and a reserve interact is a tax question worth raising with your accountant before you agree on payment terms.

Securing the loan under the PPSA

Under Ontario's Personal Property Security Act (PPSA), registering a financing statement perfects a security interest in any type of collateral. A seller who takes back a loan can register its security over the business assets in the PPSA registry. A security interest is perfected when it has attached and all steps required for perfection have been completed.

Registration matters most if the buyer becomes insolvent. An unperfected security interest is not effective against a person who represents the debtor's creditors, such as a trustee in bankruptcy, so a seller who does not register may rank as an unsecured creditor.

A registration does not last forever unless it says so. A financing statement may be registered for a perpetual period or for a set number of years stated in it, and it is effective only during that period. You must renew it before it expires if the loan is still outstanding.

• Sign a written security agreement that describes the collateral clearly.
• Register the financing statement promptly after closing.
• Diarize the expiry date and renew before it passes if money is still owing.
• Confirm the current registration rules and fees, since these are set by regulation.

If the buyer defaults

If the buyer stops paying, your rights depend on the loan and security documents and on the PPSA. A secured party that intends to dispose of collateral must give at least fifteen days' written notice to the debtor and certain other interested persons, subject to s. 63(6).

The buyer also has a right to redeem. Before you dispose of the collateral or irrevocably elect to keep it, a person entitled to notice may redeem it by fulfilling all obligations secured by the collateral and paying your reasonable enforcement expenses.

Other lenders may also hold security over the same assets, and their rank can affect what you recover. That depends on the facts and on the registrations, so it is worth checking before you agree to take back a loan.

Practical steps before you agree

• Ask how much the buyer can pay at closing and what the buyer's financial position looks like.
• Decide which assets or shares will secure the loan and whether other lenders will rank ahead of you.
• Have a lawyer prepare the promissory note, security agreement and PPSA registration.
• Talk to your accountant about the reserve and any exemption before fixing the payment schedule.
• Keep a record of renewal dates and payment dates after closing.
• Consider time limits for claims. A proceeding generally cannot be started after the second anniversary of the day a claim was discovered, unless the Act provides otherwise.

Parties to a business agreement may vary or exclude limitation periods, so the sale agreement may set its own time limits. Read these clauses carefully before you sign.

Frequently asked questions