What Does a Lawyer Check Before You Buy a Manitoba Business?

Buying a business means taking on more than equipment and a customer list. You may also take on registered security interests, unpaid tax, and employees who already have years of service. A lawyer's job before closing is to check these things so that surprises show up before you pay, not after.

Many of the checks depend on whether you are buying the assets or buying the shares of the company. This article walks through the main checks in plain language. It is general information, and your deal may need more or fewer of them.

This article covers the law of Manitoba.

Searching the registries on the seller

Any person may ask for a Personal Property Registry search by the name of a debtor in Manitoba. A lawyer uses this to see whether a lender or other creditor has registered a claim against the seller's equipment, inventory or other assets.

The search is run against the seller's exact legal name. An error in a debtor's name invalidates a registration only if a search under the correct name would not reveal it, so a search under a slightly wrong name can miss something that is still valid.

If the target is a corporation, the Manitoba Companies Office publishes instructions for corporate searches and file summaries. These are used to confirm that the corporation exists and to check its directors and filings.

Approvals and the right to sell

In an asset deal where the seller is a company, selling all or substantially all of its property outside the ordinary course of business requires shareholder approval under The Corporations Act. The sale is adopted when the holders of each class or series entitled to vote approve it by special resolution. The meeting notice must include or attach a copy or summary of the agreement and say that dissenting shareholders may be paid fair value.

A shareholder may dissent and claim the fair value of their shares, though that right is subject to other sections of the Act and to any unanimous shareholder agreement. Your lawyer checks that the vote was properly held and notes whether a dissent could complicate the closing.

Bulk sale certificate and tax debt

A sale in bulk includes a sale of inventory outside the ordinary course of business, or of tangible personal property used in the business when it is sold in connection with the seller ceasing to carry on that business or part of it. Before such a sale, the seller must apply to the director (Taxation Division) for a certificate showing there is no tax debt or that satisfactory arrangements for paying it have been made.

The director issues the certificate in duplicate, and the seller must give one duplicate to you as buyer. This matters because an asset buyer who does not get the duplicate is liable for the seller's tax debt as at the date of sale, including amounts assessed later for earlier transactions. The debt may be enforced against the buyer, the seller or both. If you do hold the duplicate and a tax debt that existed when the certificate was issued turns up later, it may be enforced against the seller but not against you.

The Taxation Division issues the clearance certificate with no fee, and the seller's application must include the sale agreement with a breakdown of the price by asset class.

This requirement applies to asset sales only. A sale of shares or partnership interests is not a sale of business assets that comprises a bulk sale, and corporate amalgamations are not treated as asset sales.

Employees, GST/HST and price allocation

When a business or part of it is sold or otherwise transferred so that control passes to another person, an employee's employment is deemed continuous and uninterrupted for the minimum-standards Divisions 2 to 5, 9 and 10 of Part 2 of The Employment Standards Code. In an asset deal, employees' service therefore carries over to you for those purposes. It is not a general rule for every employment entitlement, so your lawyer reviews the rest separately.

For GST/HST, a sale of business assets is generally taxable. You and the seller can jointly elect on Form GST44 to pay no GST/HST if you acquire all or substantially all (at least 90%) of the property needed to carry on the business. The election must be filed on or before the day your GST/HST return is due for the first reporting period in which GST/HST would otherwise have been payable.

The election is not available if the seller is a GST/HST registrant and you are not, and you must be able to keep operating the business with the acquired property. GST/HST still applies to certain items, such as taxable services by the seller, taxable leases or licences, and taxable real property if you are not a registrant.

The purchase-price allocation also matters. For capital cost allowance, you use the agreement's reasonable prices for each asset. Otherwise fair market value is allocated to each asset and to inventory, and the rest goes to goodwill in Class 14.1.

Rare federal filings

Two federal filings are uncommon on small purchases, but your lawyer will want to rule them out.

• Competition Act: pre-merger notification generally applies only when the target's Canadian assets or revenues exceed $93 million and the parties' combined Canadian assets or revenues exceed $400 million. Most small Manitoba purchases are well below this.
• Investment Canada Act: a non-Canadian buying a Manitoba business below the review thresholds must still file a notification, no later than 30 days after implementation of the investment.

What to do next

Bring your lawyer in before you sign a letter of intent or any binding agreement, so the checks can shape the price and terms. After closing, notify the CRA tax services office when an owner, partner or director changes. Corporations must give the CRA each director's correct name and social insurance number, and a new business number may be needed.

• Confirm whether you are buying assets or shares.
• Give your lawyer the seller's exact legal name.
• Ask for the duplicate bulk sale certificate in an asset deal.
• Ask whether the seller company's shareholders have approved the sale.
• Discuss whether a GST44 election fits and note its filing date.
• Agree on the purchase-price allocation with your accountant.
• Diarize the CRA notices to file after closing.

Frequently asked questions