What happens if I buy a business that is behind on rent or taxes?

Debts stay with whoever owes them, so the question is who that is after closing. The answer turns on what you buy: the company’s shares or its assets. Rent arrears and unpaid tax look alike on a balance sheet, but they land in different places once the deal is done.

If you buy the shares

In a share purchase the company is the same legal person, and under the Canada Business Corporations Act a corporation has the capacity and the rights, powers and privileges of a natural person. It keeps its leases, its tax account and its unpaid bills. The CRA treats a change of owners in a corporation as an update to the corporation’s existing business and owner information. You own a company that owes the money, so the price and agreement should deal with it.

If you buy the assets

In an asset purchase you generally take what the agreement lists. The CRA says a sole proprietorship is legally tied to one individual, so a new owner cannot continue using the old business number and must get new program accounts. One exception matters. Under subsection 160(1) of the Income Tax Act, when a person transfers property to a spouse or common-law partner, to someone under 18, or to someone they do not deal with at arm’s length, the transferee and the transferor are jointly and severally liable for amounts the transferor owes under the Act for the year of the transfer or any earlier year, up to the lesser of two amounts, one being the excess of the property’s value at transfer over the value of what was given for it.

Rent arrears and the lease

If the lease restricts assignment, buying assets means asking the landlord to consent. In Ontario the Commercial Tenancies Act deems such a covenant to carry a proviso that consent is not to be unreasonably withheld, unless the lease says otherwise. Whether arrears justify a refusal, and whether you must clear them first, turns on the lease wording and the province.

How buyers deal with it

• Ask the seller for current statements of account from the CRA and the landlord, and have your accountant review them.
• Make payment of known arrears a condition of closing, paid from the sale price.
• Add a price adjustment, holdback or indemnity for amounts that surface later.