In Ontario business sales, buyers generally prefer an Asset Purchase Agreement (APA) to avoid inheriting hidden corporate liabilities and to gain a higher tax depreciation baseline. Conversely, sellers strongly prefer a Share Purchase Agreement (SPA) because it allows them to claim the Lifetime Capital Gains Exemption (LCGE), potentially shielding over $1.25 million CAD from taxes as of 2026.
When it is time to buy or sell a business in Ontario, the most critical decision you will make alongside your commercial lawyer is determining the structure of the transaction. You are not simply handing over the keys to a storefront; you must choose between buying the specific assets inside the company or buying the legal corporate entity itself.
Whether you are acquiring a busy restaurant in Mississauga, a logistics firm in Brampton, or an established dental clinic in London, the choice between an APA and an SPA has massive financial and legal consequences. 📍 The structure dictates who assumes the risks of past mistakes, how employees are treated under provincial labour laws, and how much the Canada Revenue Agency (CRA) will demand in taxes. We highly recommend using our directory to find an experienced Ontario business lawyer to guide your negotiation.
Step-by-Step Differences in the Transaction Process
The mechanics of closing an APA versus an SPA are fundamentally different. Understanding these distinct legal pathways will help you determine which structure aligns with your business goals.
Step 1: Assessing Due Diligence Requirements
In a Share Purchase Agreement (SPA), the buyer takes over the entire corporation, “warts and all.” 🔍 This means if the company has unpaid CRA payroll taxes, pending lawsuits, or environmental violations, the new owner inherits those problems. Therefore, SPA due diligence is intense, lengthy, and expensive. In an Asset Purchase Agreement (APA), the buyer only purchases selected items (like equipment, inventory, and brand names), leaving the corporate baggage behind with the seller.
Step 2: Managing Employee Transitions
The Ontario Employment Standards Act (ESA) plays a major role in these deals. In an SPA, the employer remains the exact same corporate entity, so employee contracts continue uninterrupted. In an APA, the buyer is technically a brand new employer. The seller must formally terminate the employees (and potentially pay severance), and the buyer must offer them new employment contracts.
Step 3: Transferring Contracts and Leases
If the business relies on a lucrative commercial lease in downtown Toronto, an SPA is usually smoother. 📝 Since the corporation’s name remains on the lease, you often only need a simple “change of control” consent from the landlord. In an APA, the buyer’s new corporation must ask the landlord to assign the lease completely, which gives landlords leverage to demand higher rent or refuse the transfer altogether.
Step 4: Navigating the Tax Implications
Taxation is the primary battleground between buyers and sellers. Sellers push for an SPA to use their Lifetime Capital Gains Exemption (LCGE), allowing them to pocket a massive portion of the sale price tax-free. Buyers push for an APA so they can assign a high fair market value to the equipment they buy, allowing them to claim higher Capital Cost Allowance (CCA) tax deductions against their future profits.
How Much Does it Cost in Ontario?
The transaction structure heavily influences your closing costs, legal fees, and potential tax burdens. 💰 As of May 2026, here is what buyers and sellers should expect in CAD:
- Legal Fees for an SPA: Due to heavy due diligence and complex indemnification clauses, lawyer fees for an SPA generally range from $10,000 to $30,000+ CAD.
- Legal Fees for an APA: While due diligence is lighter, transferring hundreds of individual assets and contracts takes time. Legal fees usually range from $8,000 to $25,000 CAD.
- Sales Taxes (HST): An SPA is generally exempt from Harmonized Sales Tax. In an APA, the buyer may have to pay 13% HST on the purchase of certain assets (though exceptions exist).
- Land Transfer Tax: If real estate is involved, an APA triggers Ontario Land Transfer Tax. An SPA often avoids this because the property remains owned by the same corporate entity.
| Feature | Asset Purchase (APA) | Share Purchase (SPA) |
|---|---|---|
| Who Usually Prefers It? | The Buyer | The Seller |
| Liability Risk for Buyer | Very Low | High (Inherits all past debts) |
| Seller’s Tax Benefit (LCGE) | Not Applicable | Yes (Up to $1.25M+ tax-free) |
| Buyer’s Tax Benefit (CCA) | Yes (Step-up in asset basis) | No (Inherits old asset values) |
How Long Does the Process Take?
Transaction timelines vary based on the size of the business, but the structure creates predictable delays. 🕑 An APA typically takes between 45 and 60 days to close, as the focus is primarily on valuing inventory, transferring physical assets, and setting up new employee contracts.
An SPA usually takes longer, commonly requiring 60 to 90 days. The buyer’s lawyers and accountants must thoroughly audit years of the target corporation’s tax filings, minute books, and banking records to ensure there are no hidden lawsuits or unpaid debts lurking in the background.
Frequently Asked Questions (FAQ)
Can a buyer force an Asset Purchase if the seller wants a Share Purchase?
Everything is negotiable. If a seller insists on an SPA to claim their tax exemption, the buyer will often demand a lower purchase price to compensate for the added liability risks and the loss of future tax depreciation benefits.
Do I need to pay severance to employees during an APA?
Generally, yes. Under Ontario law, if the buyer does not offer the existing employees a new job on substantially similar terms, the seller’s corporation is legally responsible for paying the employees their statutory termination pay and severance.
What is a “Section 22 Election” in an Asset Purchase?
It is a joint tax election filed with the CRA by both the buyer and seller. It allows the transfer of accounts receivable at their face value without triggering immediate tax penalties for either party during an asset sale.
Are non-compete clauses valid in both APAs and SPAs?
Yes. While Ontario recently banned non-compete agreements for standard employees, the law specifically includes an exception for the sale of a business. Buyers in both APAs and SPAs can legally restrict the seller from opening a competing business nearby.
Leave a Reply