Canadian Laws Which Govern The Buying And Selling Of Businesses

When buying or selling a business, there are several options and transaction types, and these are all subject to Canadian business laws that govern them. A business can be sold either as an asset with all its tangibles and intangibles, or the shares of the business can be sold in case it has been incorporated and the corporation actually runs the business. The sales or purchase transaction are also subject to the provisions of several acts, some of which depend on the province the transaction is being carried out.

Difference between asset and share sales

In asset sales, the owner of the business may choose not to sell certain assets. He may also be able to use some of the corporation’s losses in order to offset the income that arises on the sale. In addition to being able to keep certain assets, the seller may also be able to benefit from a more favourable structure in case he is selling only a division of a corporation and keeping the other. In share sales, the seller may be able to reduce some taxes that must be paid on the purchase price by using some capital gains exemptions. More than the capital gains exemptions, the seller can also benefit from favourable tax treatment.  In share transactions, the legal transactions are also less complicated.

Legal steps in buying or selling a business

Before the transaction can occur, the parties involved must first define the legal terms of the transaction in a Letter of Intent. This straightforward document sets out the fundamental terms of the transaction. In it, the type of purchase, whether it is assets or shares specified, and also the lists of assets and liabilities are mentioned.

The Canadian law also requires the participants to sign a share purchase or asset purchase agreement, and besides containing all the terms of the transaction, the agreement also needs to have specified all representations and warranties concerning all operations of the business that is being sold.

Other legal requirements

The Canadian business laws also have set statutory requirements which apply to the transaction. Regardless of the type of transaction, whether it is asset or share sale, all these statutory requirements are applicable. All asset sales are subject to the Bulk Sales Act in Ontario, and in the same province, the Retail Sales tax also applies to this type of transaction. Both of these sales types will also need to comply with the provisions of the Investment Canada Act and the Competition Act. These depend on the size as well as the nature of the transaction. Both the asset and the share transactions will be subjected to the Income Tax Act provisions. A properly structured transaction may be eligible for reduced taxes for both the buyer and the seller.

Canadian regulations also require non-competition from the seller. What this implies is that the seller must not compete with the buyer that is purchasing the business. This refers to both direct and indirect completion. There are also statutory requirements of non-solicitation and non-disclosure which must be met.