Legal Considerations When Buying a Business in Canada

Buying a business is a powerful move for budding entrepreneurs. It lands them straight to the profit-making stage without going through the struggles of establishment and brand-building. Starting from scratch is a long journey involving several steps of getting the required registrations, licences, commercial leases, staff members, stock, equipment, funding, etc. Completion of all these tasks to set up an organisation requires a lot of effort, money and time. However, individuals who purchase an existing business for sale in Canada can skip all the slogging.

It makes entrepreneurship a cakewalk and attracts many amateurs who acquire turnkey businesses to start making profits. While finding these high-performing businesses is easy with the help of online marketplaces, completing the legal formalities is a task. They should be prepared for transferring several contracts, intellectual property, and other obligations. Let us help you understand legal considerations when buying a business in Canada. It can make the process easy and prevent you from making costly mistakes.

1. GST/HST Payable on Sale of Property

Goods and Services Tax/ Harmonised Sales Tax (GST/HST) is a sales tax applied to goods and services sold in the country. It is also applicable to real property and intangible personal property. Individuals who purchase a Canadian business for sale along with commercial property can elect not to pay GST/HST on the transaction by filling out the GST44 form. The seller and the buyer must jointly elect for this non-payment.

They cannot use this election if the seller is GST registered, but the buyer is not. Also, it cannot be elected until the entire property is purchased in the sale instead of just buying assets. The buyer must remember that GST/HST will be applicable even after making the election to a taxable supply of a service provided by the seller. The Canada Revenue Agency can slap penalties and interest on parties that do not comply with the tax regulations.

2. Understanding Legal Liabilities of Acquisition

The buyer must hire a lawyer to help them evaluate the business's legal obligations before purchase. It prepares the buyer for the upcoming legal responsibilities and becomes aware of pending lawsuits filed by suppliers, employees or customers. Most sellers would try to hide this information from the prospective buyers to close the deal for a profitable price. The buyer must carefully examine the commercial property lease agreement if the seller does not own the workplace.

They must also check the employee and supplier contracts to know their obligations towards them. It ensures compliance and avoids breaching legally binding agreements. They should also understand the business structure (Sole proprietorship, partnership, corporation, etc.) to learn about the income tax implications and tax deductions for expenses.

3. Name Change and Business Number

Entrepreneurs need a business number (BN) when they incorporate or require a Canada Revenue Agency (CRA) program account. They also need this number to communicate with provincial and municipal government departments or use a federal program. Individuals who purchase a business for sale in Canada must understand that a legal entity can have only one business number.

Thus, they must apply for a new BN when the legal ownership of the entity changes or its structure is transformed. They must inform the CRA about the changes in the business information to ensure they keep getting notifications, refunds, and other payments.

4. Business Licences and Permits

Every business operating in the country requires licences and permits to function legally. For example, bar owners need various licences, including liquor licences, resale permits, signage permits, music licences, live entertainment licences, etc. The lawyer can help the buyer to identify if the seller has all the required licences and permits. Operating without them can lead to problems like fines and even business shutdowns.

The buyer must check if the business has municipal licensing, environmental and zoning permits, provincial registration, federal registration, etc. The licences are specific for every industry and must be evaluated by the buyer along with the permits. The licences will have to be transferred to the new owner and the process must be done legally.

5. Transfer of Intellectual Property

Every business has intellectual property, including copyrights, trademarks, patents, etc. These are unique and innovative works of the business and must be protected from getting copied with the help of intellectual property (IP) protection. Individuals who purchase businesses for sale in Canada must get the IP transferred by signing a legally binding contract known as the IP assignment agreement. The agreement must be registered with the Canadian Intellectual Property Office while registering the asset purchase agreement. The contract should be examined with the help of a lawyer to understand the permitted use and protection of IP.

6. Review All the Agreements

The purchase agreement is the most important document of leadership transfer. The buyer must read and understand it completely after completing the due diligence. The seller may also ask the buyer to sign a confidentiality agreement before the sale to ensure the transfer of ownership remains a secret until the actual sale. The buyer can also stay protected during negotiations by asking the seller to sign an exclusivity agreement. It prohibits the seller from getting into sale discussions with anyone when the buyer completes the purchase's formalities. The seller must provide the buyer with all the necessary documents and contracts signed with third parties to allow them to function smoothly.

7. Complete the Transaction

When buying a business for sale Canada, it is essential to complete the financial due diligence of the entity along with legal examination. The business should be stable and primed for growth. The last step of the sales process is signing the purchase agreement. Both parties must agree on the payment plan since it can be upfront or in instalments. The purchase agreement must include all the required details and should be customised for the sale by a lawyer. The buyer must get all the additional legal documents, such as share and asset agreements to complete the purchase.

Wrapping Up

Buying a business is simple but requires some legal and financial due diligence to stay protected. Compliance is the key to operating successfully and evaluating all legal obligations can help stay on the path of the law and prevent any violations.