Buying a Rival's Business Without an HST Bill at Closing

The situation

Maricel worked shifts as an air traffic controller. Ramon taught full time at a university. On the side, the two had spent eight years building a small scaffolding and rigging equipment supply company that served the industrial plants around Sarnia, renting and selling the steel framing, hoists, and safety gear that contractors needed for maintenance shutdowns. It was steady, unglamorous work, and it had grown enough that they were turning away jobs for lack of inventory.

Their largest local competitor was a company owned by Gabriela, who had built it over two decades and was ready to retire. When Gabriela mentioned to Maricel at an industry event that she was thinking about winding the business down rather than finding a buyer, Maricel and Ramon saw an opening. Buying Gabriela's company outright would roughly double their equipment fleet and hand them her existing client contracts overnight, instead of years of slowly building market share. After several months of informal talks, the three agreed on a purchase price of roughly $3,200,000 for the business as a going concern — the equipment, inventory, the lease on the yard, the client list, and the goodwill built up over twenty years, all sold together as an operating business rather than piece by piece.

Maricel and Ramon came to Treadstone Law once the broad terms were agreed, wanting the deal papered properly before they committed real money. Neither had bought a business before. Their existing company was small enough that they had handled its formation themselves years earlier, and this transaction was an order of magnitude larger and more complicated than anything they had done.

The tax problem hiding in the deal

The first issue our team flagged had nothing to do with the equipment or the client list. It was HST — the harmonized sales tax that applies to most business transactions in Ontario at 13 percent. On a purchase price of roughly $3,200,000, HST charged in the ordinary way would come to about $416,000. Under the general rule, a seller charges HST on a sale of business assets and the buyer pays it at closing, then recovers it later by claiming an input tax credit on their own HST return, since the assets are being used in a commercial activity.

In theory that makes the tax a wash over time. In practice, it can be a serious cash-flow problem. Maricel and Ramon would have needed to find roughly $416,000 in addition to the purchase price itself, just to hand it to Gabriela so she could remit it to the government, before claiming it back weeks or months later once their next HST return was filed. For a deal already stretching their financing, that was money they did not have sitting available.

The Excise Tax Act, which governs HST, includes a relief provision for exactly this situation. Where a business is sold as a going concern — meaning the buyer is acquiring all or substantially all of the property necessary to carry on the same kind of business the seller was operating, and intends to continue operating it — the buyer and seller can jointly elect to treat the sale as though no tax were payable on the qualifying assets. No HST changes hands at closing, and neither side has to finance or track a large in-and-out tax amount. The election has to be signed by both parties, filed with the tax return covering the reporting period of the sale, and the underlying facts genuinely have to meet the going concern conditions — a seller who keeps back key assets, or a buyer who plans to use the business for something different, can put the election offside.

Layered on top of that was a second issue: the purchase price of $3,200,000 had been agreed as a single number, with no breakdown of what it represented. For tax purposes, a lump sum paid for a bundle of business assets has to be allocated across categories — equipment, inventory, goodwill, and any restrictive covenant such as a non-compete — because each category is taxed differently. Gabriela and the buyers had very different interests in how that allocation would land, and neither side had thought about it yet.

What we did

1. Confirmed the going concern test was actually met. Our team reviewed what was and was not included in the sale — the equipment fleet, the inventory, the assignment of the yard lease, the client contracts, and the goodwill — to confirm that Maricel and Ramon were acquiring everything necessary to keep running the same kind of business Gabriela had operated, with no material assets carved out. That confirmation mattered, because filing the election on a sale that does not qualify can leave both parties assessed for the unpaid tax later, with interest, once the Canada Revenue Agency reviews the return.
2. Prepared and filed the joint HST election. Both Gabriela and the buyers' company signed the prescribed election, which was then filed with the applicable HST return for the reporting period covering the closing date. No tax was charged or collected on the qualifying business assets at closing, which meant Maricel and Ramon never had to raise the roughly $416,000 in the first place.
3. Negotiated the purchase price allocation clause by clause. Gabriela's preference was to allocate as much of the price as possible to goodwill, which typically produces a more favourable tax result for a seller than allocating to depreciable equipment. Maricel and Ramon preferred more of the price allocated to equipment and inventory, which they could write off over time against their own income as the business generated revenue. Rather than leave the split unresolved — which invites the Canada Revenue Agency to assign its own allocation on audit, one that may not match what either side reported — our team negotiated a specific, itemized schedule: roughly $1,800,000 to equipment and vehicles, $250,000 to inventory on hand at closing, and the remainder to goodwill and a two-year non-compete covenant restricting Gabriela from starting a competing business in the area.
4. Built the allocation into the asset purchase agreement as a binding schedule. Both sides agreed in writing to file their tax returns consistently with the agreed allocation, reducing the risk that a mismatch between the buyer's and seller's reported numbers would draw attention from the tax authority.
5. Handled the ordinary closing mechanics alongside the tax work. This included due diligence on the equipment fleet and outstanding liens, assignment of the yard lease with the landlord's consent, and confirming which employees would transfer and on what terms, so that the tax planning did not come at the expense of the operational details that make an acquisition actually work day to day.

The outcome

The deal closed on the agreed date, roughly four months after Maricel and Ramon first retained our team. No HST changed hands on the business assets, which meant the full $3,200,000 in financing they had arranged went toward the purchase price itself rather than a tax bill they would have had to recover later. The itemized allocation schedule gave both sides a defensible, agreed position to report on their respective tax returns, rather than a dispute waiting to surface at tax time or in a future audit.

For Gabriela, the allocation weighted toward goodwill and the non-compete matched what she and her own accountant had hoped for going into retirement. For Maricel and Ramon, the larger allocation to equipment and inventory meant they could begin claiming those costs against their income from the very first year of running the combined operation, easing the pressure of the debt they had taken on to finance the purchase.

Roughly a year after closing, the combined business was running under one name out of Gabriela's former yard, with Maricel and Ramon's original equipment absorbed into the larger fleet. Maricel kept her shifts at the control tower for another year before stepping back to run the business full time; Ramon continued teaching while handling the company's books in the evenings, much as he had with the smaller operation. The transaction became, in hindsight, less a leap into unfamiliar territory and more a scaled-up version of a partnership they already understood — the difference was in the size of the numbers and the number of ways the deal could have gone sideways on the tax side if the election or the allocation had been left unaddressed.

What you can learn from this