- A purchase agreement should state clearly what is being sold, for how much, and how the price is split among assets.
- Some obligations, such as PST and employee service, can pass to a buyer by law, so the agreement should address them.
- Closing conditions should cover lien searches and a discharge of the seller's lender where needed.
You are about to sign a deal to buy or sell a business, and the purchase agreement is in front of you. It is usually long, and it is the document a court or both parties will look to if something later goes wrong.
This checklist walks through the clauses that matter most in British Columbia and why each one is there. Every business is different, so treat it as a starting point for a conversation with your lawyer.
This article covers the law of British Columbia.
Parties, structure and what is being sold
The agreement should name the buyer, the seller and, if a company is involved, the company. It should say whether the deal is an asset purchase or a share purchase. In a share purchase, the buyer takes the company with its history and liabilities, and the tax values of its assets do not change.
In an asset purchase, list the assets being bought: equipment, inventory, contracts, leases, intellectual property and goodwill. If an asset is not listed, there may be an argument later about whether it was included.
Price, allocation and taxes
On an asset purchase the price must be allocated to each asset at fair market value, with the remaining balance attributed to goodwill, and the allocation should match what the vendor reports. Goodwill has been depreciable property in CCA Class 14.1 since January 1, 2017, claimed at 5%.
For PST on an asset sale, goodwill, accounts receivable, franchise fees, real property and shares of a business are non-taxable, and inventory is exempt if the buyer gives a PST number or a Certificate of Exemption – General (FIN 490). The parties cannot raise the goodwill price and lower the taxable-asset prices to avoid PST. A buyer without a PST number must self-assess PST on taxable items using the Casual Remittance Return (FIN 405) by the last day of the month following the purchase.
On GST/HST, the buyer and seller may jointly elect (Form GST44) so that no GST/HST is payable on the sale when the buyer acquires all or substantially all of the property needed to carry on the business. The election is unavailable where the supplier is a registrant and the recipient is not, and even with the election, GST/HST can still apply to certain services, leases and licences, and to sales of real property where the recipient is not a registrant. An accountant should confirm how these rules apply to your deal.
Clauses that protect against hidden risks
| Clause | Why it matters |
|---|---|
| Liens and encumbrances | The Personal Property Registry records security agreements and commercial liens, and a prior lender's registration can rank ahead of a buyer's claim. |
| Lender discharge | A debtor or a person with an interest in the collateral can give a written demand, and the secured party must register a change within 40 days. |
| PST clearance | Without a clearance certificate, the buyer is liable for an amount equal to what the seller owes. |
| Non-resident seller | A buyer of taxable Canadian property from a non-resident may have to remit 25% of the amount by which the cost exceeds the certificate limit, and with no certificate the limit is zero so 25% applies to the whole cost; exceptions can apply. |
| Employees | The buyer generally takes on the seller's obligations to employees who stay. If the seller terminates employees before the sale, the purchaser is not liable for their outstanding wages and compensation, and employees who refuse to work for the buyer without substantial changes to their conditions are deemed to have quit. If a trustee in bankruptcy sells the business as a going concern, the buyer is not liable for wages owed before the bankruptcy, and prior service is not treated as continuous. |
Representations, conditions and closing
The agreement normally includes representations and warranties, which are the seller's statements about the business, and sometimes the buyer's statements about itself. These are covered in a separate article on this site.
Also look for closing conditions, such as satisfactory due diligence, landlord consent and financing. Deposit terms should say who holds the deposit and what happens to it if the deal fails. A BC court may relieve against penalties and forfeitures on terms it sees fit, but the Act has no dedicated deposit rules, so the agreement should be clear.
If the sale includes land or a lease, remember that a contract respecting land is not enforceable without a signed writing, an act or acquiescence by the party, or reasonable reliance, and paying or accepting a deposit counts as such an act.
What to do next
- Search the Personal Property Registry through Service BC, a mailed request, or a lawyer or search agent, since direct online access is limited to professionals with a premium account. A PPR search alone does not reveal every lien, because builders' liens, family maintenance liens and some other liens are filed with other agencies.
- Order a land title search if the business owns or holds an interest in land.
- Run a corporate search to see current directors if the seller is a BC company.
- Apply for a PST clearance online or using Application for Clearance (FIN 447), with the collector's consent.
- Ask your accountant to review the price allocation and any GST/HST election.
- Ask about WorkSafeBC and other clearances that may apply to your deal.
- Have a lawyer review the full draft before you sign.
Frequently asked questions
Do I need a lawyer to prepare a business purchase agreement?
Nothing in this article says you must, but the agreement deals with tax, liens, employees and liability that can be costly to get wrong. A lawyer can tailor the clauses to your deal and explain the risks before you sign.
What is the difference between an asset and a share purchase?
In an asset purchase the buyer chooses and pays for particular assets, and the price is allocated among them. In a share purchase the buyer takes the company with its history and liabilities.
Who pays PST on a business sale?
Goodwill, accounts receivable, real property and shares are non-taxable on an asset sale, and inventory is exempt if the buyer gives a PST number or a Certificate of Exemption – General (FIN 490), but other assets may attract PST. A buyer without a PST number must self-assess using the FIN 405 return.
How long do I have to sue if the seller misled me?
A court proceeding generally must not be started more than 2 years after the claim is discovered. Get advice early, because the date of discovery can be argued.
Sources
- gov.bc.ca – Personal property liens and searches — www2.gov.bc.ca
- Personal Property Security Act (BC), s.35 — bclaws.gov.bc.ca
- LTSA – Fees — ltsa.ca
- gov.bc.ca – PST: Buying and selling a business — www2.gov.bc.ca
- gov.bc.ca – ESA Interpretation Guidelines, Part 11, Section 97 — www2.gov.bc.ca
- Income Tax Act, s.116 — Justice Laws (federal)
- Excise Tax Act, s.167 — Justice Laws (federal)
- CRA – Buying a business — canada.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
This is a buying & selling a business question
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