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It is the first real decision in any Ontario business sale, it is usually settled in the letter of intent, and it changes the price, the tax bill, the liabilities that travel with the business and the consents you will need to close.
Book My 15-Minute Assessment →Ontario repealed the Bulk Sales Act in 2017, so asset purchasers no longer follow bulk sales procedures. Successor liability did not disappear. It now runs through tax legislation, the Workplace Safety and Insurance Act and the Employment Standards Act, 2000.
It depends which side you are on. Vendors usually prefer share sales because the gain is capital in nature and may qualify for the lifetime capital gains exemption on qualified small business corporation shares. Purchasers usually prefer asset purchases because they assume only specified liabilities and can step up the tax cost of the assets acquired. The gap is normally bridged through price, holdbacks and indemnities.
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In a share purchase, the buyer acquires the shares of the corporation from its shareholders. The corporation continues unchanged: it keeps its contracts, its leases, its licences, its bank accounts, its employees, its tax history and every liability it has ever incurred, known or unknown. Only the ownership at the top has changed. In an asset purchase, the buyer acquires identified assets from the corporation itself, and assumes only the liabilities it expressly agrees to assume. The vendor corporation remains in existence holding the sale proceeds and whatever was not sold.
That distinction drives almost everything else. It determines who bears the risk of an unknown liability, who pays how much tax and when, which third parties have to consent before closing, what happens to the employees, and how long the closing takes. Vendors and purchasers have systematically opposite preferences, so the structure question is genuinely adversarial and should be settled in the letter of intent, before either party has spent money on diligence.
Lexaltico LLP acts for both buyers and sellers of Ontario private companies. This page explains how the two structures differ so you can walk into the negotiation informed. It is general information, not advice on your transaction, and the tax analysis in particular must be run with your accountant on your actual numbers.
| Issue | Share purchase | Asset purchase |
|---|---|---|
| What is acquired | All of the issued shares of the corporation | Selected assets, listed in a schedule |
| Liabilities | All liabilities remain in the corporation and pass with it, including unknown ones | Only the liabilities the buyer expressly assumes |
| Usually preferred by | The vendor | The purchaser |
| Vendor tax treatment | Capital gain; the lifetime capital gains exemption may apply to qualified small business corporation shares | Gain taxed inside the corporation, then a second layer of tax to get the proceeds out to the shareholder |
| Purchaser tax treatment | Inherits the corporation existing tax cost of its assets | Steps up the tax cost of depreciable assets to the price paid and allocated |
| Contracts and leases | Continue automatically unless a change of control clause requires consent | Must be assigned, and most require the counterparty consent |
| Employees | Employment continues uninterrupted; the employer has not changed | The vendor terminates and the buyer offers new employment; service is still recognised under the ESA successor employer rules |
| Land transfer tax | Not triggered by a share transfer | Payable on real property transferred, plus municipal land transfer tax in Toronto |
| HST | Not applicable to a share sale | Applies unless the parties make a valid joint election under section 167 of the Excise Tax Act |
| Closing complexity | Generally simpler mechanically, heavier on diligence | Heavier on mechanics: schedules, assignments, consents, PPSA discharges |
The economic gap created by these differences is usually bridged with price rather than argued to a standstill. A vendor who agrees to an asset sale that costs them the capital gains exemption will ask for a higher price; a buyer who agrees to a share purchase will ask for stronger indemnities, a larger holdback and a longer survival period on the representations.
A vendor who sells shares realises a capital gain personally. If the shares are qualified small business corporation shares, a substantial lifetime capital gains exemption may shelter part of that gain; the exemption is indexed and currently exceeds one million dollars per individual, and the precise amount for the year of sale should be confirmed with your accountant. Qualification depends on asset-use tests measured over the 24 months preceding the sale, so a corporation holding excess cash, investments or non-active assets may need to be purified well in advance.
A vendor who sells assets faces two layers. The corporation is taxed on the sale, with recapture of capital cost allowance taxed as ordinary income, gains on goodwill taxed under the eligible capital property successor rules, and capital gains on appreciated property. The after-tax proceeds must then be distributed to the shareholder, generating a second tax event, mitigated in part by any capital dividend account balance created by the non-taxable half of capital gains. The combined burden is frequently materially higher than on a share sale.
Purchasers see the mirror image. In an asset deal, the price is allocated across the assets in the agreement, and the allocation sets the buyer's tax cost, generating future capital cost allowance and amortisation deductions. That allocation is negotiated, must be reasonable, and should be consistent between the parties. In a share deal the buyer inherits historical tax cost and gets no step-up, which is why buyers discount share purchases or seek indemnities for pre-closing tax exposure.
On the sale of a business or part of a business, a joint election under section 167 of the Excise Tax Act can allow the transfer to occur with no HST payable, provided the purchaser is acquiring all or substantially all of the property needed to carry on the business and the purchaser is registered. Where accounts receivable are sold, an election under section 22 of the Income Tax Act allows the vendor to deduct, and the purchaser to include, the shortfall on collection. Both must be documented at closing.
Ontario repealed the Bulk Sales Act in 2017, ending the requirement that asset purchasers obtain creditor statements and affidavits or risk having the sale voidable. That simplified asset deals considerably, but it did not make asset purchasers immune from the vendor's history. Several statutes still attach liability to the business or the assets rather than to the corporation that owned them.
Employment is the clearest example. Under the successor employer provisions of the Employment Standards Act, 2000, where a business or part of a business is sold and an employee of the vendor is employed by the purchaser, the employee's service with the vendor counts as service with the purchaser for statutory purposes including notice, severance and vacation entitlement. At common law, courts also frequently credit prior service in assessing reasonable notice unless the purchaser has clearly and validly contracted otherwise and provided fresh consideration. Buyers who assume they are hiring employees with zero years of service are usually wrong.
Other examples: unpaid workplace safety and insurance premiums can follow the business, which is why a clearance certificate from the Workplace Safety and Insurance Board is standard at closing; environmental obligations attach to contaminated land under the Environmental Protection Act; registered security interests attach to the assets under the Personal Property Security Act until discharged; and certain tax liabilities can follow property transferred between non-arm's-length parties. Each of these is managed by searches, clearance certificates, discharges, holdbacks and indemnities.
In an asset deal, every material contract has to be assigned, and most commercial contracts prohibit assignment without the counterparty's consent. Commercial leases almost always require landlord consent and often give the landlord the right to impose conditions, take a fee, or in some cases terminate. Licences and permits frequently cannot be transferred at all and must be reapplied for. Collecting consents is the single most common cause of delay in Ontario asset transactions, and it should start the day the letter of intent is signed.
In a share deal, contracts continue automatically, but many of them contain change of control provisions that treat a transfer of shares as if it were an assignment. Bank facilities, franchise agreements, key customer contracts, technology licences and leases commonly include them. A buyer who assumes a share purchase avoids consent risk without reading the contracts is taking an unquantified risk.
Regulatory clearance can apply to either structure. Part IX of the Competition Act requires pre-merger notification where both the party-size threshold, currently $400 million in Canadian assets or revenues, and the annually indexed transaction-size threshold are exceeded, with a waiting period after filing. The Commissioner of Competition may challenge a completed merger before the Competition Tribunal for up to three years after closing even where no notification was required. Acquisitions by non-Canadians may require notification or net benefit review under the Investment Canada Act, and any transaction can attract a national security review.
The letter of intent should state the structure, the price and how it is calculated, the treatment of working capital and debt, exclusivity, the holdback or escrow, the expected survival period for representations, the key conditions to closing, and the target timetable. Almost all of a letter of intent is non-binding, but the exclusivity, confidentiality, costs and governing law provisions are binding and should be drafted as carefully as the definitive agreement.
Hybrid structures exist and are sometimes the right answer: a share purchase preceded by the corporation distributing out excess cash, redundant real estate or a non-core division; an asset purchase of one division from a corporation that continues with the rest; or a share purchase with a pre-closing reorganisation that separates the operating business from the property it occupies. Each of these has tax consequences that must be modelled before, not after, the agreement is signed.
If you are buying or selling an Ontario business, engage counsel before signing the letter of intent. Structure is far easier to set than to change, and by the time a definitive agreement is being drafted, the commercial expectations are usually fixed. Contact our corporate group to discuss structuring your transaction.
Headline price is rarely what changes hands. Most private transactions are agreed on a cash-free, debt-free basis with a normalised working capital target, meaning the seller keeps the cash, repays the debt, and delivers the business with enough receivables, inventory and payables to keep operating. If actual working capital at closing exceeds the target, the price goes up; if it falls short, the price goes down. Defining the target, the accounting policies used to calculate it, and who prepares the closing statement is where most post-closing disputes originate, so those definitions deserve as much attention as the price itself.
The alternative is a locked box, in which the parties fix the price by reference to a recent balance sheet date and the buyer takes the economic risk and benefit of the business from that date forward, protected by covenants against leakage such as dividends, bonuses or related-party payments between the locked box date and closing. Locked box mechanics give certainty and avoid a post-closing adjustment process, but they require the buyer to be confident in the reference accounts, which usually means better quality financial reporting than many owner-managed businesses have.
Where the parties cannot agree on value, an earn-out bridges the gap by making part of the price contingent on the business hitting defined targets after closing. Earn-outs are useful and dangerous in equal measure. The metric must be objectively measurable and resistant to manipulation, the agreement must say how the business will be operated during the earn-out period, and it must address what happens if the buyer restructures, reallocates costs, or sells the business before the period ends. Vendor take-back financing, in which the seller is paid over time with interest and security, serves a similar bridging function and carries its own set of protections to negotiate.
Holdbacks and escrows sit alongside these mechanics. A portion of the price is retained, usually for one to two years, as the practical source of recovery for indemnity claims. The amount, the release schedule, whether it is held by a third party, and whether it is the buyer's exclusive remedy are all negotiated. Sellers should understand that the structure of the payment terms often affects their after-tax proceeds and the timing of the tax, which is another reason to involve your accountant before the letter of intent is signed rather than after.
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