Picture two offers for the same auto parts distributor in a Brampton industrial unit. Both name the same price. One buyer wants to purchase the racking, the inventory, the customer list and the company name. The other wants to buy every share of the corporation that owns all of those things. On paper the businesses look identical, and the cheque might be the same size, yet the legal results are very different. Each offer leaves different debts with different people, and each is taxed differently.
That is the core of the asset-versus-share question. In an asset sale, the corporation stays with its current owner and sells selected things it owns. In a share sale, the owner sells the corporation itself, and everything inside it goes along, including problems nobody has found yet.
This article gives general information about Ontario business sales. It is not legal or tax advice, and the right structure for a particular deal depends on the company’s records, its tax position and what the parties have agreed.
The Basic Difference, in One Example
Assume a hypothetical Ontario corporation, Maple Parts Inc., owned by one shareholder. In an asset sale, Maple Parts Inc. is the seller. The buyer receives the listed assets and, usually, whichever liabilities it expressly agrees to take over. After closing, Maple Parts Inc. still exists, holds the sale proceeds and still answers for its past. The shareholder then has to decide how to get that money out of the corporation.
In a share sale, the shareholder is the seller. Maple Parts Inc. does not sell anything and nothing moves out of it. Its leases, bank accounts, licences, employees, tax history and any lawsuit waiting to happen all stay where they are. What changes is who owns the company.
Almost every other difference flows from that one fact.
Why Buyers Often Lean Toward Assets
The biggest attraction for a buyer is control over what comes across. A buyer can leave behind an unpaid supplier dispute, an old warranty claim or a tax reassessment that relates to the seller’s years of ownership. That protection is strong, but it has limits. Some obligations can follow a business or its assets regardless of what the contract says, and employment standards are one example, as discussed below. Assets may also be subject to registered security interests, so a buyer who fails to check could take equipment that a lender still has rights over.
Tax is the other draw. A buyer of assets can generally record what it paid for equipment and other depreciable property as its new cost and claim capital cost allowance on that figure. The purchase agreement should therefore allocate the price among the assets, because that allocation affects both sides’ tax bills and the two parties often want opposite things. A buyer usually prefers more of the price on items that can be written off quickly, while a seller may prefer otherwise.
The cost is paperwork. Every asset class has to be identified and transferred properly. Vehicles need ownership transfers. Domain names, phone numbers, software licences, trademarks and supplier accounts each have their own process. If the sale includes land, a transfer must be registered and Ontario land transfer tax will normally apply, and the agreement must also deal with HST.
Why Sellers Often Lean Toward Shares
For many owner-managers, the appeal is tax. When an individual sells shares of a qualifying small business corporation, a gain may be sheltered by the lifetime capital gains exemption, which stands at $1.25 million and is subject to indexing. Whether the shares qualify depends on detailed tests about the corporation’s assets, how long the shares were held and how the business has been run. Those tests can sometimes require planning a good while before any sale, so an accountant should be involved early rather than at the end.
A share sale also offers a cleaner departure in principle. The corporation goes with its liabilities and the seller walks away with the proceeds. In practice, a careful buyer will not accept that risk without protection. Expect detailed representations and warranties about taxes, litigation, employees and financial statements, along with indemnities that keep the seller on the hook for problems that existed before closing. Some buyers hold back part of the price for a period as security for those promises.
An asset sale can leave the seller with two layers of tax to think about: tax in the corporation on its gains and recaptured depreciation, then personal tax when the money is taken out. A seller who is offered a higher price for assets should compare after-tax results and not just headline numbers. Your lawyer and accountant should run this together.
How Contracts and Approvals Behave
In a share sale, the contracting party does not change. Maple Parts Inc. was the tenant before closing and remains the tenant after. That can be a real advantage where a business holds a favourable lease or a valuable customer agreement. But read the documents closely. Many commercial leases, franchise agreements, credit facilities and supply contracts contain a change of control clause that treats a share sale as an assignment needing the other side’s consent.
In an asset sale, contracts generally have to be assigned to the buyer. Where a contract requires consent, the other party must agree, and a landlord or major customer may use that moment to renegotiate. Before signing, make a list of the contracts that actually matter, read the assignment clauses and make the necessary consents a condition of closing. Someone buying a franchised outlet should also look closely at the franchisor’s transfer rules; our page on franchise matters describes that area of work.
Permits and registrations raise the same question. Some belong to a particular legal entity and do not simply transfer with equipment. A business operating in Brampton should confirm with the City and any relevant regulator whether a licence or approval carries on, must be transferred, or must be applied for afresh by the buyer.
Employees: The Part People Get Wrong
Owners sometimes assume an asset sale wipes the slate clean for staff. It does not, at least for statutory purposes. Under section 9 of Ontario’s Employment Standards Act, 2000, when a purchaser of a business hires the seller’s employee, prior service is generally counted for purposes of the Act, such as termination and severance entitlements. A worker with twelve years at Maple Parts Inc. may therefore arrive at the buyer with twelve years of credit under the statute.
Common law is a separate issue. An asset buyer can usually choose which employees to offer jobs to and on what terms, and an employee the buyer does not hire may have claims against the seller. How prior service is treated in a later wrongful dismissal claim depends on the facts and the wording of the offer. Sellers should work out, before closing, who pays if people are not taken on.
In a share sale, the employer never changes. Contracts, seniority and accrued entitlements all stay in place. A buyer who plans to reorganize afterward takes on the full cost of doing that.
Federally regulated businesses, such as many interprovincial carriers, fall under different labour rules, and they need their own review.
Due Diligence Looks Different Under Each Structure
A share buyer is purchasing a history, so it needs to investigate that history. Typical steps include reviewing the corporate minute book, financial statements and tax filings; confirming source deductions and HST were remitted; checking for lawsuits and executions; reviewing employment contracts and WSIB standing; and searching for registered security under the Personal Property Security Act.
An asset buyer can narrow that review, yet still has work to do. Title to each significant asset needs checking. Security registrations must be discharged or dealt with at closing. Ontario’s Bulk Sales Act, which once imposed creditor-notice steps on many asset deals, has been repealed, so buyers no longer follow that procedure. That repeal does not remove the need to search for liens and to ask whether any tax or government clearance would be sensible.
If the seller is not a Canadian resident, the buyer has another issue to raise. Section 116 of the Income Tax Act can put the buyer at risk if a clearance certificate is not obtained for certain property, so the agreement should address this directly.
Tax Points to Raise With Your Accountant
No article can substitute for numbers run on your own facts, but these questions should be on the table:
- Do the shares qualify for the capital gains exemption, and would any preparatory steps be needed first?
- In an asset sale, can the parties use the joint election under section 167 of the Excise Tax Act, which may allow a purchase of all or substantially all of a business’s assets without HST being paid at closing?
- How is the purchase price allocated among inventory, equipment, goodwill and any non-competition covenant, and do both parties report it consistently?
- Will the seller’s corporation be wound up after the sale, or will it continue to hold the proceeds?
- Is land part of the deal, and how will land transfer tax be handled?
Non-Competes and Keeping the Goodwill
A buyer who pays for goodwill will want some assurance that the seller will not open across the road the following month. Ontario’s Employment Standards Act, 2000 generally prohibits employers from entering non-compete agreements with employees, yet there is an exception connected to the sale of a business where the seller becomes an employee of the buyer immediately afterward. There is a separate exception for certain executives. Outside employment, a non-compete negotiated as part of a business sale is usually viewed more favourably by courts than one imposed on an ordinary worker, provided it is reasonable in length, geography and scope.
A covenant that covers “all of Ontario” for a shop serving Peel Region invites challenge. Tie the restriction to the area and customers the business actually serves. It is also worth drafting non-solicitation terms covering customers and staff.
So Which Is Better?
Neither one wins in every case. A share sale often suits a seller seeking tax relief and a buyer who needs contracts, licences or a lease to stay undisturbed, and who is satisfied after diligence that the company’s past is clean. An asset sale often suits a buyer worried about unknown liabilities, or one who wants only part of a business, such as a single location or product line.
Price is where these interests meet. Sellers who insist on a share sale sometimes accept a lower price or stronger indemnities. Buyers who insist on assets sometimes pay more to offset the seller’s extra tax. Some deals use a hybrid, for example a share sale after unwanted assets are moved out. Those steps can carry their own tax consequences and call for professional advice.
As for the order of operations, start with an accountant’s estimate of after-tax outcomes. Before any letter of intent is signed, decide which structure you are proposing and why, because even a non-binding letter can anchor the negotiation. Have your lawyer identify lease and contract consents early. Tidy up the corporate records, and expect the other side to ask for them. Our page on the purchase and sale of businesses outlines the kind of work involved, and a conversation with a lawyer before you commit to a structure may save time and expense later.
The label on a deal matters because of what it decides: who owns the past, who pays the tax, and who needs whose permission. Answer those three questions honestly, and the choice between assets and shares usually becomes much clearer.