Asset Purchase Agreement in Ontario: Everything You Should Know

Key Takeaways

• An asset purchase agreement (APA) is a legally binding business acquisition agreement where the buyer acquires specific assets of a business, rather than buying shares of the company.
• Choosing between asset purchase and share purchase can significantly impact tax implications, liabilities, and control over the business.
• A well-drafted Business Asset Purchase Agreement ensures clarity on included and excluded assets, liabilities, and representations.
• Legal guidance from an experienced corporate Lawyer in Ontario helps avoid common asset purchase pitfalls/mistakes and ensures compliance with Ontario corporate and tax laws.
• Due diligence in asset purchase is critical to evaluate financial, legal, and operational risks before signing.
• Professional drafting prevents disputes by addressing employment contracts in APA, intellectual property transfer, non-compete clauses, and closing conditions clearly.

Introduction

Buying or selling a business can be one of the most significant decisions an entrepreneur makes. As a first-time purchaser looking to expand or as a seller looking to move out, it is important to understand how an asset purchase agreement (APA) works. It involves rigorous planning, negotiation, careful tax planning and effective risk management.

 

At Pacific legal, our lawyers engage with the investors and business owners to understand their goals, interests, rights, and liabilities to draft, negotiate and finalize asset purchase agreements. Our approach is simple, transparent and accessible, which aims to guide and support the clients. Drawing on experience across many industries, we spot potential issues early and craft agreements that not only protect business interests but also reflect each client’s unique commercial objectives.

 

This article explains the concept of an APA, its benefits, critical clauses, and why professional legal support, particularly from an experienced Ontario corporate law team, is crucial to a smooth, successful transaction.

What is an Asset Purchase Agreement?

An asset purchase agreement (APA) is a contract through which a buyer is able to acquire certain assets of a business, including equipment, inventory, intellectual property, and goodwill, without acquiring the shares of the company. This arrangement provides the buyer with the flexibility to select precisely the assets and liabilities transferred to avoid risk and undesirable liabilities.

 

Since the buyer is able to choose the constituents of the deal, the transaction can be tailored to meet the goals of the purchaser to ensure a high value with low exposure.

 

In Canada (Attorney General) v. Fairmont Hotels Inc., [2016] 2 S.C.R. 720¹, the Supreme Court of Canada clarified that courts will not rewrite contracts solely to achieve a more tax-efficient result unless there is clear evidence of mistake or misrepresentation. This case highlights the need to be precise in drawing tax-sensitive contracts, including Asset Purchase Agreements. The Courts and tax authorities have a tendency to enforce deals as they are written. Every clause and allocation must be scrutinized thoroughly by buyers and sellers to avoid unexpected tax liability.

 

After Fairmont Hotels, parties should ensure that their APAs clearly reflect commercial intentions, especially regarding purchase price allocation, assumed liabilities, and tax elections.

 

Imagine you want to buy business assets in Ontario, such as the kitchen equipment, brand name, and customer list of a restaurant, without taking over its outstanding tax debts or employee disputes. A carefully drafted APA allows you to structure the transaction that way, protecting you from inheriting problems you never intended to assume.

Why Use Asset Purchase Agreements?

There are several reasons why buyers and sellers prefer an APA over a share purchase:

• Control over Liabilities: Buyers have an opportunity to sell off their undesired liabilities like lawsuits, long-term debts or future regulatory sanctions so they begin with a cleaner balance sheet.
• Flexibility: Buyers can select only profitable or strategic assets, such as intellectual property, customer contracts, or equipment, while leaving behind obsolete inventory or underperforming divisions.
• Tax Advantages: When structured properly, an APA can provide a higher tax cost base for assets, allowing buyers to claim capital cost allowance (CCA) deductions and improve cash flow.
• Clean Exit for Sellers: Sellers can reorganize or wind down their business after the sale, keeping assets or liabilities that were not part of the transaction.

In Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54 [CanLII]², the Supreme Court of Canada emphasized the need to reflect the commercial intent in financial and tax-sensitive contracts. Furthermore, the court held that the contracts ought to be properly written, and quantities and resources must be properly divided to prevent unwanted tax effects or misunderstandings with official bodies. This case indicates that the parties to the purchase or sale of assets require accuracy when writing an asset purchase agreement (APA); accuracy in the purchase price, liability transfer and representations are necessary to indicate the intent of the deal and to ensure both parties are not caught by legal or tax issues.

 

By attributing a minor portion of the purchase price to depreciable equipment and a huge portion to goodwill, the parties may deny the buyer valuable depreciation deductions, which increases his taxable income. Conversely, the sellers may unintentionally cause capital gains treatment in case the allocations are not negotiated extensively.

 

Think of an APA as a shopping cart; you carefully choose which items (assets) to include, which ones to leave behind, and how much to pay for each, because each price tag affects your future tax bill.

Key Clauses in an Asset Purchase Agreement

A well-drafted business sale agreement in Ontario typically includes several important sections, and each plays a practical role in protecting both the buyer and seller. Here’s a more detailed look:

1. Description of Included and Excluded Assets:

This is like making a shopping list before heading to the store. It spells out exactly which equipment, inventory, contracts, and rights are being transferred, and which are not (for example, the seller’s personal car or unrelated investments).

2. Purchase Price and Allocation:

Imagine splitting the bill at a restaurant. The purchase price must be broken down between assets like equipment, inventory, and goodwill. This affects how much tax the buyer and seller will pay.

3. Representations and Warranties:

These are promises from the seller, like saying, “Yes, the machines work, we own everything we’re selling, and we are not hiding lawsuits.” If these promises turn out to be false, the buyer can seek compensation.

4. Closing Conditions:

Think of this as a checklist of to‑dos before the deal can officially close. Examples include getting landlord consent to transfer a lease or receiving clearance certificates from the tax authorities.

5. Non‑Compete Clause:

Prevents the seller from opening a competing business right next door the next day. For instance, if you buy a bakery, you don’t want the seller opening a new one across the street immediately.

6. Liabilities in Asset Purchase:

Specifies which debts or obligations, if any, the buyer is agreeing to take over. This avoids surprise bills later.

7. Employment Contracts:

Clarifies which employees will be hired by the new owner, under what terms, and whether past vacation pay or severance will be honoured.

8. Intellectual Property Transfer:

Ensures that logos, trademarks, and copyrights are formally assigned so the buyer can keep using the brand.

 

In People’s Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68 [CanLII], ³the Supreme Court of Canada emphasized the importance of directors’ duties and accurate representations when transferring business assets. The case demonstrates the significance of attentive documents, precise allocation of assets, and precise representations. These measures eliminate any legal challenges, cushion the purchasers against the unknown liabilities and make the transaction reflect the commercial intentions of the parties.

Imagine that you purchased a small cafe. The asset purchase agreement will include the espresso machines, tables, and customer database as assets transferable, but the personal laptop of the seller will not be included. A part of the purchase will be attributed to goodwill in terms of the reputation of the café. The agreement will also have a non-compete clause that includes that the seller shall not establish another cafe within a distance of 5km within the period of two years.

Picture a detailed checklist being ticked off one by one; each clause is a safety net preventing future misunderstandings or disputes.

Steps to Drafting and Executing an Asset Purchase Agreement

It is important to remember that drafting an APA is a step-by-step process before you begin the paperwork. Every step is an extension of the last step in order to ensure that nothing is overlooked. The following outline is simple to follow:

1. Preliminary Negotiation: This is the first conversation where the buyer and seller discuss the big picture, what assets are on the table, the rough price, and a target timeline. Let’s consider an example: you want to buy a bakery. You and the seller might agree that you will buy the ovens, recipes, and customer list, but not their delivery van or personal kitchen tools.
2. Due Diligence in Asset Purchase: This is the “investigation stage.” For instance, you would check the bakery’s financial records, supplier contracts, equipment maintenance logs, and employee agreements. If you discover unpaid electricity bills or a health inspection issue, you can ask the seller to fix these before moving ahead, just like checking a used car before buying it.
3. Drafting the Agreement: Once everything checks out, lawyers prepare a sample asset purchase agreement in Canada tailored to your deal. For example, it will clearly state that you are paying $200,000, that the seller is including three ovens and two fridges, and that they promise there are no hidden lawsuits involving the bakery.
4. Review and Revisions: Here, both sides negotiate the fine print. For example, you might want a clause that stops the seller from opening another bakery within 5 km for the next three years, while the seller might request to keep one of the smaller ovens.
5. Execution and Closing: Finally, everyone signs, money is exchanged, and you officially own the bakery. Post‑closing, you might transfer the phone number, notify customers about the new owner, and change utility accounts to your name.

Think of this process like building a house step by step. Due diligence is the foundation; without it, everything else could collapse. The agreement acts as the frame and walls, giving shape and structure to the deal. Negotiation is like the installation of windows, doors and paint: everything is custom-made.  The final signatures serve as the roof which closes a house and completes it, in order to be able to move into it. Due diligence helps to identify an issue behind the scenes in the business you are purchasing, just as the inspection of a house reveals some unknown problems in the house before you can move in.

Why You Need a Corporate Lawyer for an Asset Purchase Agreement

Engaging a corporate lawyer in Ontario is crucial because:

• They recognize and eliminate legal risks- such as discovering the liabilities that were latent, or contain clauses that cannot be enforced.
• They ensure that you remain compliant in Ontario corporate and tax laws and protect you against future audits or fines.
• They protect you from asset purchase pitfalls/mistakes to avoid, like forgetting to transfer key licences or misallocating the purchase price.
• They help negotiate favourable terms, ensuring your business acquisition agreement reflects your financial and strategic interests.

Imagine buying a dental clinic. Without a lawyer, you might forget to confirm that the seller’s lease can be transferred to you, leaving you without a place to operate. A lawyer would catch this during due diligence and negotiate landlord consent before you close.

How Pacific Legal Can Help

At Pacific Legal, we go beyond just drafting documents. We work with you from the first negotiation call to the final closing day:

• Risk Review: We identify the legal, financial, and tax risks before they become a problem.
• Customized Agreements: We prepare tailored asset transfer agreements that fit your unique deal. 
• Negotiation Support: We represent you during discussions to secure fair pricing, clear clauses, and balanced liabilities.
• Closing Assistance: We ensure a smooth handover of assets, employees, and licences so business operations continue without disruption.

Buying or selling a business is a major milestone, and a well‑structured asset purchase agreement can make the difference between a smooth transition and costly disputes. With the right legal guidance, you can protect your interests, reduce risks, and set up your business for success. Our team helps entrepreneurs and investors navigate every stage of the process, from due diligence to closing, so you can focus on growing your business with confidence. Book a Free Consultation with Our Business Lawyers

FAQs

Q1: What is included in an asset purchase agreement?

An APA includes a detailed list of assets being sold (like equipment, inventory, and intellectual property), how the purchase price is divided among those assets, promises made by the seller about the condition of the business (called representations and warranties), the conditions that must be met before closing (like getting landlord approval for a lease transfer), and any post‑closing steps like handing over customer lists or helping with the transition.

Q2: How is an asset purchase taxed in Ontario?

In Ontario, the buyer usually gets a “step‑up” in the value of the assets, meaning they can claim more depreciation for tax purposes. The seller, however, might have to pay capital gains tax or recapture tax if the assets have gone up in value.

For instance, if the seller’s equipment was originally purchased for $10,000 but is sold for $20,000, the seller pays tax on the $10,000 gain. Always speak to a lawyer or tax advisor to plan ahead.

Q3: Can I use a template for an asset purchase agreement?

While an asset purchase agreement template in Ontario can help you understand the structure, using a generic template without legal advice can be risky. Every business has unique issues, like employee contracts, unpaid taxes, or equipment leases, that must be addressed properly.

Q4: What is the difference between an APA and SPA?

An assets purchase agreement (APA) only transfers the assets that the seller has selected, and thus the purchaser avoids the undesired liabilities. A share purchase agreement (SPA) transfers the entire company, and therefore, the buyer assumes the debts, contracts, and legal liabilities.

 

For example, when you purchase shares, you are putting yourself in the shoes of the seller entirely; when you purchase assets, you can always pick and choose what you actually need, and leave behind old lawsuits or tax problems.

Q5: What are common mistakes to avoid in an APA?

Some frequent pitfalls include forgetting to clearly list included and excluded assets, failing to check for hidden liabilities, not addressing employee obligations, and skipping tax planning.

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