Most asset sales of a business in Ontario can close without HST changing hands, but only if the buyer and seller jointly elect and the deal actually meets the test. Get it wrong and the tax is 13% of the taxable portion of the price.
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From $3,388.87 taxes included
Selling shares is an exempt supply. Shares are a financial instrument, so no HST arises on the price paid for them, which is one reason a share deal looks simpler at closing. Selling assets is different: each asset transferred is its own supply, and most of them — equipment, inventory, vehicles, intangibles — are taxable at 13% in Ontario.
Not everything in an asset sale is taxable. Where the buyer is acquiring all or substantially all of the property needed to carry on the business, the <a href="https://laws-lois.justice.gc.ca/eng/acts/E-15/">Excise Tax Act</a> takes the part of the price reasonably attributable to goodwill out of the tax calculation entirely, with no election required. Accounts receivable are financial instruments and are treated separately again.
That makes the price allocation a tax document as well as a commercial one. It determines how much of the purchase price is taxable, what capital cost the buyer starts with, and what the seller reports. Agree it in the purchase agreement, and have both sides file consistently with it rather than each taking the position that suits them.
If the deal includes land or a building, that is a separate supply with its own rules, and the conveyance also attracts <a href="https://www.ontario.ca/laws/statute/90l06">land transfer tax</a>. Real property is the piece most often handled wrongly on a small business sale, and it is the one where the numbers are largest.
The Excise Tax Act allows a buyer and seller to elect jointly so that no tax is payable on the supplies made under the agreement. The condition is real and it gets tested: under the agreement the buyer must be acquiring ownership, possession or use of all or substantially all of the property that can reasonably be regarded as necessary for the buyer to carry on the business as a business.
There is a registration rule that catches people. The election is not available where the seller is a GST/HST registrant and the buyer is not. In practice the buying corporation should be registered before closing, with an effective date on or before the closing date, and the registration number should be recited in the purchase agreement.
Even with the election in place, tax still applies to three things: a taxable service the seller is to render after closing — a transition or consulting arrangement, for example — property supplied by way of lease or licence rather than sold outright, and a taxable sale of real property where the buyer is not a registrant.
The election is made in the prescribed form, signed by both parties, and filed by the buyer with its GST/HST return for the first reporting period in which the tax would otherwise have become payable. It is not filed by the seller and it is not filed with the agreement. Signing it at closing and never filing it is a common and expensive mistake.
The seller's exposure is that the election fails and CRA assesses the seller for tax it never collected. The answer is a clause requiring the buyer to be registered, to sign and file the election, and to indemnify the seller for any tax, interest and penalties assessed if it does not — backed by a holdback where the buying company is thinly capitalized.
The buyer's exposure is paying tax it never budgeted for. If the seller carves out assets the business actually needs — the vehicles, equipment held in a related company, the intellectual property — the all-or-substantially-all test can fail and tax becomes payable on the whole taxable portion. Check what is being excluded before you agree the price, not after.
Where real property is included and the buyer is registered, the seller is generally not required to collect the tax on that supply. The buyer accounts for it directly and claims an offsetting input tax credit in the same return, so the cash effect is usually nil. Where the buyer is not registered, the seller must collect it, and it is real money.
None of this touches the seller's own arrears. HST and payroll amounts the seller's corporation owes stay with that corporation, which matters to a share buyer far more than to an asset buyer — see <a href="/business-due-diligence-lawyer-ontario">due diligence</a> and <a href="/asset-vs-share-purchase-lawyer-ontario">structure</a>. Our fee for a straightforward purchase or sale starts at $3,388.87, taxes included — <a href="/pricing">see pricing</a>.
On an asset purchase, yes in principle, because most of the assets are taxable supplies. In practice most deals avoid it, because buyer and seller jointly elect under the Excise Tax Act where the buyer is acquiring substantially everything needed to carry on the business. On a share purchase, no HST applies to the shares.
Then the election is not available where the seller is registered. The buying corporation should register before closing, with an effective date on or before the closing day, and the number should be recited in the purchase agreement. Registration is quick, but leaving it to closing week is how the election gets lost.
No, where the deal meets the test. Where the buyer is acquiring all or substantially all of the property needed to carry on the business, the Excise Tax Act takes the part of the price reasonably attributable to goodwill out of the tax calculation, with no election required. That is separate from the joint election covering the other assets.
No. Shares are a financial instrument and the sale is an exempt supply, so no HST arises on the price of the shares. That does not make the deal tax-free. The seller has a capital gain, and the corporation's own HST account, filings and any arrears carry on unchanged into the buyer's hands.
Yes. The buyer, if a registrant, must file it with its return for the first reporting period in which the tax would otherwise have become payable. An unfiled election is the most common HST problem on small business sales, and the assessment usually lands on the seller for tax it never collected from the buyer.
Open your file tonight — a licensed Ontario lawyer will confirm everything with you by tomorrow.