Almost no business sale pays the seller the full price on closing day. Some of it is held back against risks that have not surfaced yet. The fight is never about whether to hold money back — it is about how much, for how long, and who decides when it comes out.
Our charges include applicable taxes. Disbursements are extra and billed at cost — itemized upfront, in writing, never hidden.
From $3,388.87 taxes included
A buyer signs the agreement relying on what the seller has said about the business — the tax filings are current, the equipment is owned, there is no litigation, the customer contracts are assignable. Most of those statements cannot be verified until after closing, and some not for a year or more. A holdback keeps a fund available to answer the ones that turn out to be wrong.
There are three usual kinds. A general indemnity holdback backs the seller's representations and warranties across the board. A tax holdback covers assessments for periods before closing, which is a share-sale problem in particular, because the buyer inherits the corporation's entire tax history. A specific holdback covers a known open item — a landlord consent still outstanding, a licence not yet transferred, a lawsuit not yet resolved.
Ontario repealed the bulk-sales legislation that used to give buyers a statutory route for dealing with a seller's creditors. Nothing replaced it. What buyers now rely on instead is diligence — personal property security searches, corporate and court searches, tax and workplace-insurance clearances — backed by an indemnity, and a holdback to make that indemnity worth something.
There is one holdback nobody negotiates, because it is imposed. Where the seller is not resident in Canada and the property being sold is taxable Canadian property, the <a href="https://laws-lois.justice.gc.ca/eng/acts/I-3.3/">Income Tax Act</a> makes the buyer personally liable to remit 25 per cent of the cost of the property unless the seller produces a clearance certificate. Some categories of property attract a higher rate. Buyers hold that amount back and remit it.
The cheapest arrangement is for one lawyer to hold the funds in trust. It works when the release terms are mechanical — an amount, a date, and no discretion. It works badly when release depends on judgment, because a lawyer holding trust funds cannot decide a contested question between two parties and will simply freeze the money until both sides agree or a court orders otherwise.
A separate escrow agreement fixes that by writing the decision rule down. It names the holder, states the amount, sets the release dates, and specifies exactly what document produces a release — usually a joint written direction, failing which a court order or an arbitral award. It also says who earns the interest, who pays the holder's fees, and what the holder does when it receives conflicting instructions.
Deadlock is the scenario to draft for. Without a tie-breaker, a buyer with a weak claim can hold the entire fund hostage simply by refusing to sign a direction. The usual answers are a requirement that any claim be delivered in writing with particulars before the release date, automatic release of everything not properly claimed, and a fast arbitration for whatever remains genuinely in dispute.
In an asset sale the buyer also wants the seller's HST position settled. Where substantially all of the property needed to carry on the business is being sold, the <a href="https://laws-lois.justice.gc.ca/eng/acts/E-15/">Excise Tax Act</a> allows a joint election that removes tax from most of the supplies — but it is unavailable where the seller is registered for HST and the buyer is not. Buyers who are not yet registered should register before closing.
A holdback is a source of payment. The indemnity is what creates the obligation to pay. If the indemnity expires before the holdback is released, or is capped below the holdback amount, or is subject to a threshold the claim never reaches, the money simply goes back to the seller. Draft the two together, and match the release dates to the survival periods deliberately rather than by accident.
Survival periods are usually tiered. General representations survive for a defined period tied to when problems would realistically surface. Fundamental representations — title to the shares or assets, corporate authority, ownership of key property — survive far longer or indefinitely, because a defect in them destroys the whole deal. Tax representations are normally tied to how long the tax authorities can reassess the pre-closing years.
Then come the money limits. A threshold or basket stops the buyer bringing trivial claims, and the drafting matters: a true deductible means the seller pays only the excess, while a tipping basket means the seller pays everything once the threshold is crossed. A cap limits total exposure. A sole-remedy clause confines the buyer to the indemnity, which sellers want and buyers should read closely.
Decide expressly whether the holdback is the buyer's only recourse or merely security for a larger indemnity. Sellers want the first. Buyers want the second. Both positions are defensible; what is not defensible is leaving it unsaid. Our starting fee for a straightforward Ontario purchase or sale is $3,388.87, taxes included — see <a href="/pricing">full pricing</a> or our <a href="/buying-selling-a-business">business sale practice</a>.
It is part of the purchase price that is not paid to the seller on closing. It is retained, either in a lawyer's trust account or with an escrow agent, for a set period so the buyer has a source of payment if the seller's representations turn out to be inaccurate or a pre-closing liability surfaces. Whatever is not claimed is released to the seller.
There is no statutory period. The holdback should be matched to how long the underlying indemnity survives, and that is negotiated. General representations usually get a shorter period than tax or title representations, because tax exposure runs until the reassessment period closes. Staged releases are common — part released early, the balance held for the longer-tail risks.
A lawyer's trust account is fine where release is purely mechanical, such as a fixed amount on a fixed date. If release depends on whether a claim has been made, use a written escrow agreement naming the holder and setting out the exact document that triggers release, what happens on conflicting instructions, and how a deadlock gets resolved.
Where the seller is not resident in Canada and is disposing of taxable Canadian property, the buyer is personally liable to remit 25 per cent of the cost of the property to the Receiver General unless the seller produces a clearance certificate. Certain property types attract a higher rate. Buyers hold that amount back at closing and remit it within the required time.
Without a tie-breaker clause the money stays frozen until both sides sign or a court orders release, which can take longer than the holdback period itself. A properly drafted escrow agreement requires written claims with particulars by a deadline, releases automatically anything not claimed, and sends the disputed balance to arbitration on a short timetable.
Open your file tonight — a licensed Ontario lawyer will confirm everything with you by tomorrow.