Can a new corporation buy a business’s assets and leave its liabilities behind?

A newly formed buying company is a normal part of an asset purchase and can keep the deal’s risks apart from the buyer’s other businesses. What it cannot do is switch off liabilities that the law attaches to a business or its assets. The practical question is which obligations follow the assets, the staff or the money, whoever the buyer is. Our guide to asset sales versus share sales explains the starting position.

In British Columbia, employees keep their service

British Columbia’s Employment Standards Act deems employment continuous and uninterrupted when all or part of a business is disposed of. The Branch’s guide says the purchaser must honour past service, assumes the seller’s obligations to those employees under the Act, and takes on accrued vacation pay. Other provinces have their own rules, so check the one where the employees work.

Workers’ compensation and sales tax

WorkSafeBC warns that if a seller owes unpaid premiums, the firm’s assets may be subject to a lien in its favour, and says a clearance letter protects the buyer. Alberta’s WCB says a buyer has a responsibility to get a clearance when buying a business, its stock or equipment. In British Columbia, a purchaser who does not obtain a PST clearance certificate is liable for amounts the seller still owes as a collector.

When the buyer is related to the seller

The Income Tax Act makes a transferee and transferor jointly and severally liable when property is transferred to a spouse or common-law partner, to a person under 18, or to a person the transferor does not deal with at arm’s length. The amount is the lesser of the excess of the property’s fair market value over the fair market value of what was given for it and what the transferor owes under the Act for the year of the transfer and earlier years. A new company owned by the seller’s spouse or another non-arm’s-length person is a case to raise with a tax adviser. Buyers usually deal with all of this through clearances, a purchase agreement that names assumed and excluded liabilities, and a seller indemnity.