- An asset purchase agreement lets a buyer choose which assets to acquire, but some obligations can still follow the business, such as amounts the seller owed under the Workplace Safety and Insurance Act.
- The price is usually allocated across the assets, and the tax result generally follows a reasonable allocation.
- Employee service and GST/HST rules work differently in an asset sale than in a share sale.
When you buy a business, you can buy the company that owns it, or you can buy the business's assets. An asset purchase agreement is the contract used for the second route.
This article explains what the agreement generally covers, what typically does and does not transfer, and why the allocation of the price matters. Your own deal may differ, so confirm the details with a lawyer and an accountant.
What an asset purchase agreement does
In an asset purchase, the buyer and seller agree on a list of assets that will change hands, such as equipment, inventory, customer lists, intellectual property and goodwill. The agreement also sets the price, the closing date, the statements each side makes, and who takes on which obligations.
The attraction for a buyer is control over what is acquired. In a share purchase the corporation stays the same legal entity, and WSIB policy notes that buyers acquiring share capital take on the seller's liabilities by law.
Which assets and liabilities transfer
- Assets: only what the agreement lists transfers, so descriptions should be specific.
- Contracts and leases: these often need the other party's consent before they can be assigned.
- Liens: before buying used business assets, a buyer can search Ontario's Personal Property Security Registration system through ServiceOntario's Access Now.
- Excluded assets and liabilities: the agreement should say plainly what the seller keeps and what stays with the seller.
Not every liability stays behind. When an employer sells, leases, transfers or otherwise disposes of all or part of its business, the buyer is liable for all amounts the seller owed under the Workplace Safety and Insurance Act immediately before the sale. A purchase certificate relieves the buyer of that liability up to the sale date, if the seller's account is in good standing. If only part of a business is bought and the buyer cannot give adequate proof of the value acquired, the WSIB pro-rates the seller's liability and charges the buyer that share.
Employees and non-competes
If an employer sells a business or part of it and the buyer employs one of the seller's employees, the employment is deemed not to have been terminated for ESA purposes, and time worked for the seller counts as time worked for the buyer. The employee's total time must be taken into account for rights such as notice of termination, vacation and leaves. The rule does not apply if the buyer hires the employee more than 13 weeks after the earlier of the last day with the seller and the day of the sale.
Buyers often want the seller to agree not to compete. Since October 25, 2021, the ESA bars employers from entering into an agreement with an employee that includes a non-compete. One exception applies where a business or part of one is sold, the seller becomes the buyer's employee immediately after, and the restriction is agreed as part of the sale. The Ontario guide describes that business as one run as a sole proprietorship or partnership. Executives are also excepted. Whether a particular restriction is enforceable can still be decided by the courts.
Allocating the purchase price
The price is normally split among the assets, and that split affects taxes. Under the Income Tax Act, if part of an amount received is payment for property, part for services and part for a restrictive covenant, each part is deemed to be paid for that item, and the result follows a reasonable allocation. Amounts received for a restrictive covenant are generally included in income. In a business or share sale to an arm's length buyer, that rule is switched off in set cases, such as where the amount is already taxed as employment income, and some of those cases depend on an election.
For the buyer, if the agreement sets individual asset prices and they are reasonable, they can be used to calculate capital cost allowance. Otherwise the buyer must reasonably allocate the price to each asset at fair market value, and the balance goes to goodwill. The CRA says the buyer's allocation should match the amounts the seller used when reporting the sale.
On GST/HST, buyer and seller may jointly elect so that no GST/HST is payable on the supply of the property where the buyer acquires all or substantially all of the property needed to carry on the business. The election cannot be made if the seller sells only individual assets, and it is not available where the seller is a registrant and the buyer is not. Even with the election, GST/HST still applies to taxable services the seller is to provide, to taxable supplies of property by lease or licence, and, where the buyer is not a registrant, to taxable sales of real property.
What to do next
- Decide with your advisers whether an asset or share purchase suits you.
- List the assets, contracts and liabilities you want included or excluded.
- Search for liens and check the seller's WSIB status.
- Agree the price allocation early, and make sure buyer and seller report consistently.
- Ask a lawyer and accountant to review the agreement and any elections before signing.
Frequently asked questions
Is an asset purchase agreement the same as a share purchase agreement?
No. An asset purchase agreement transfers chosen assets, while a share purchase transfers ownership of the corporation. The legal and tax consequences differ, for example on GST/HST and WSIB liability.
Do the employees move to the buyer automatically?
Not automatically. If the buyer employs one of the seller's employees, employment is treated as continuous for ESA purposes. That does not apply if the buyer hires the employee more than 13 weeks after the earlier of the last day with the seller and the sale.
Why does price allocation matter?
It affects the tax treatment for both sides. The tax result follows a reasonable allocation, and the CRA says the buyer's allocation should match what the seller reported.
Can a buyer ask the seller not to compete?
Often, yes, but the ESA limits non-competes with employees. There are exceptions for certain sales where the seller becomes the buyer's employee and for executives. A lawyer can confirm how these apply to your deal.
Sources
- Ontario.ca – Your guide to the Employment Standards Act: Non-compete agreements — ontario.ca
- Ontario.ca – ESA Policy and Interpretation Manual, Part XV.1 Non-compete agreements — ontario.ca
- Ontario.ca – ESA Policy and Interpretation Manual, Part IV Continuity of employment — ontario.ca
- Ontario.ca – Your guide to the Employment Standards Act: Continuity of employment — ontario.ca
- Justice Laws – Income Tax Act, s. 68 — Justice Laws (federal)
- Canada Revenue Agency – Buying an existing business — canada.ca
- Justice Laws – Income Tax Act, s. 56.4 — Justice Laws (federal)
- Justice Laws – Excise Tax Act, s. 167 — 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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