When a business is carved out of a larger company, the payroll system, the ERP, the email domain and the insurance usually stay behind. A transitional services agreement is the seller's binding promise to keep running those things for a fixed period while the buyer stands up its own.
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List every service by name. Payroll processing, bookkeeping and month-end close, IT support, email and domain hosting, ERP or accounting system access, order processing, warehousing and logistics, customer support lines, and any regulatory licence or insurance policy that stays with the seller while the buyer applies for its own. For each one, say who performs it, what volume is covered, what the price is, and how long it runs.
Anything not on the schedule is not a service. That sounds obvious, and it is where almost every TSA argument starts — the buyer assumed "IT support" covered a system migration, the seller assumed it meant answering the phone. Write down the boundary. Where a service may need to scale, say what happens if volumes rise, and price the excess in advance.
Do not forget services running the other way. In a carve-out the buyer often ends up holding something the seller still needs — a warehouse, a customer database, a lease, staff who support a retained business line. A reverse schedule on the same terms avoids negotiating the whole thing again in three months when the seller notices.
Set a fixed initial term ending on a stated date, with one or more extensions at the recipient's option at a stated rate, usually a higher one to create pressure to migrate. The recipient should be able to terminate any individual service early on notice, because it will finish migrating some systems long before others. The provider should not be able to walk away at all except for material non-payment after notice and a cure period.
Pick a pricing basis and name it: fully loaded cost, cost plus a stated margin, or a flat monthly fee per service. Flat fees are easier to administer and easier to argue about; cost-based pricing needs an audit right and a definition of what costs are included. Either way, say when invoices go out, when they are due, and whether the recipient can set off against anything owed under the purchase agreement — usually it cannot.
HST applies. Transitional services are a taxable supply, and the provider has to charge and remit HST on the fees and issue compliant invoices. The section 167 election under the Excise Tax Act, which lets buyer and seller elect out of HST on the sale of a business, applies to the sale itself and not to services supplied afterwards under a separate agreement. Budget for the tax and register the recipient for HST input tax credits if it is not already.
Set the service standard against history, not against perfection. The usual formulation is that services will be provided with the same degree of care, and to substantially the same standard, as they were provided to the business in the twelve months before closing, using the same personnel where reasonably available. "Commercially reasonable efforts" on its own means very little when the person who ran payroll has left.
Cap liability, but cap it sensibly. A provider typically wants exposure limited to the fees paid for the affected service and no liability for consequential loss. A recipient should insist on carve-outs for gross negligence, wilful misconduct, breach of confidentiality, and privacy incidents — and should think hard about whether a failure that stops the business from invoicing customers is really something it wants capped at one month's service fee.
Data is the part people leave to last. If the seller continues to process employee or customer personal information after closing, the arrangement has to satisfy PIPEDA: a written agreement, use limited to providing the service, comparable safeguards, control over subcontractors, and prompt notice of any breach. Where staff are seconded, be explicit about who the legal employer is — Employment Standards Act, 2000 obligations follow the employment relationship as it actually operates, not as the document labels it.
A TSA without a migration plan becomes permanent. Attach a plan with dated milestones and a named owner on each side, and make the provider's cooperation on data extraction an express obligation — including the format the data comes out in and who owns it. "We can only export it as a PDF" at month eleven is a real and common problem.
Keep TSA remedies separate from the purchase agreement. A service failure should be a claim under the TSA, subject to the TSA's caps, and should not draw down the indemnity escrow unless you have deliberately said so. Cross-defaults between the two documents look tidy and cause chaos, because they let a modest service dispute jeopardise the whole deal.
Build in an escalation ladder. Named individuals on each side within five business days, then named executives, then whatever dispute mechanism you have chosen. Most TSA disputes are operational and get solved by two people who understand the systems talking to each other before either side involves lawyers.
Long enough to migrate the slowest system, plus a buffer. Payroll and email usually move quickly. An ERP or accounting system, regulatory licences, and anything requiring a customer or supplier to re-paper takes considerably longer. The practical answer is a fixed initial term with extension options the recipient can exercise, at a higher rate. A term that is too short is renegotiated under pressure, which is the worst position for the buyer to be in.
Yes. Transitional services are a taxable supply, so the provider charges and remits HST on the fees and the recipient claims input tax credits if it is registered. The election under section 167 of the Excise Tax Act, which lets buyer and seller elect out of HST on the transfer of the business itself, does not extend to services supplied later under a separate agreement. Make sure the recipient's HST registration is in place before the first invoice.
That depends entirely on what you agreed. If the standard is "substantially the same as historically provided", you have something measurable to point at. If it is "commercially reasonable efforts", you have an argument. Build in a short cure period, a right to terminate the affected service and source it elsewhere at the provider's cost, and a service credit against fees. Then decide consciously whether a failure that stops the business should sit inside or outside the liability cap.
Usually not, because in a share purchase nothing inside the company moves — the systems, the contracts and the staff all stay where they are. TSAs belong to asset purchases and to carve-outs, where the business being bought has been sharing infrastructure with a parent. The exception is a share purchase out of a group, where the target company has been using the parent's IT, payroll or insurance. Then you need one.
They can, but be deliberate about it. If they remain employed by the seller and are seconded, the seller stays the employer for Employment Standards Act, 2000 purposes and the TSA should say so, allocate the cost, and address what happens if one of them resigns. If the buyer directs their work day to day, there is a real risk of a common employer finding regardless of the paperwork. Where the plan is for them to move, move them at closing rather than drifting.
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