Should I buy the assets or the shares of the business?

How an asset purchase works

You, or a corporation you set up, buy listed assets from the seller: equipment, inventory, goodwill, the business name, customer lists, the contracts you choose to take and the lease if the landlord consents. Liabilities stay with the seller unless the agreement says you assume them. Because you are the new owner of each asset, its tax cost resets to what you paid, which matters for future depreciation.

The price of that clean start is paperwork. Every contract, licence, permit and account has to be moved or reissued, employees must be hired afresh, and HST would apply to the sale unless you and the seller make the joint election under s. 167 of the Excise Tax Act.

How a share purchase works

You buy the shares of the corporation from its shareholders. The corporation does not change, so its contracts, lease, licences, bank accounts, tax accounts and employees carry on without assignment, subject to any change-of-control clauses. Sellers often prefer shares because a gain on qualifying small business corporation shares may be sheltered by the lifetime capital gains exemption.

You also inherit everything the corporation has done: old tax years, undisclosed claims, employee service, environmental history. There is no reset of the tax cost of the assets. Share deals therefore lean heavily on representations, warranties, indemnities and a holdback, and on a careful review of the minute book.

Price allocation and the tax elections

In an asset deal the price must be allocated among the assets, and s. 68 of the Income Tax Act lets the Canada Revenue Agency substitute a reasonable allocation if yours is not. Buyer and seller usually want different things: you prefer value on depreciable equipment, the seller prefers goodwill or shares. The allocation belongs in the agreement, settled before closing, with both accountants involved. The price allocation calculator below shows how the pieces interact.

Two elections come up constantly. The s. 167 election removes HST from the sale of a business where you acquire all or substantially all of what is needed to carry it on. The s. 22 election lets receivables be sold so that bad debts are deductible to the buyer.

Representations, warranties, indemnities and holdbacks

Representations and warranties are the seller's statements of fact about the business: the financial statements are accurate, taxes are paid, there is no litigation, the equipment is owned and unencumbered. If one is wrong, the indemnity clause says who pays and how much. Expect negotiation over survival periods, a cap on the seller's exposure, a basket below which small claims are ignored, and whether fundamental warranties such as title and tax are treated differently.

A holdback or escrow keeps part of the price in a lawyer's trust account for a set period so that a valid claim can actually be paid. It is the buyer's most practical protection in a share purchase.

What we do on the agreement

We draft or review the asset purchase agreement or share purchase agreement, negotiate the warranties, indemnities and closing conditions, and prepare the closing agenda that lists every document and consent needed on the day. Where you buy through a new corporation we incorporate and organize it and, if you have partners, prepare the shareholder agreement. The published price for buying a business is a flat fee, and we tell you before starting if something about the deal takes it outside that scope.