Debts a buyer can inherit in BC: taxes, wages, WorkSafeBC and PST

You have found a business to buy and agreed a price. The seller assures you that its debts are its own problem and will stay behind when you take over.

Often that is true, but not always. Several BC statutes let the seller's unpaid PST or WorkSafeBC premiums reach a buyer, and employees you keep bring their years of service with them, so it pays to know where the gaps are before you close.

Why the seller's debts can become yours

Most buyers expect to pay for a business and leave its old problems with the seller. Whether that happens depends first on how the deal is structured, and then on a handful of statutes that let government bodies and employees look to the buyer anyway.

• In a share purchase, you buy the company itself. Its debts, tax filings, employment obligations and lawsuits stay inside the company, which now belongs to you. The price and the purchase agreement have to account for all of them.
• In an asset purchase, you buy selected assets and usually leave the company and its debts behind with the seller. That is the main attraction of the structure, but the protection is not complete.

Our guide to share purchase or asset purchase covers the wider trade-offs. This article focuses on the liabilities that can follow the business even in an asset deal, and what to ask for to deal with them.

Unpaid PST: the bulk transaction rule

Section 187 of BC's Provincial Sales Tax Act deals with a "bulk transaction", which includes buying substantially all of a PST collector's BC inventory, substantially all of the tangible property or software it uses in its BC business, or an interest in its business. If you buy through a bulk transaction without getting from the seller a duplicate copy of a clearance certificate issued by the Province, you must pay the government an amount equal to all PST the seller owed for that business on the date of the transaction.

The Province's guidance on buying and selling a business advises purchasers to make sure they have a clearance certificate before they buy. The seller can apply for duplicate copies and give one to the buyer, or the buyer can request a copy directly with the seller's consent, either online or on the printable Application for Clearance (FIN 447). Under the Act, the certificate is issued only if all PST the seller owes for the business has been paid.

The same guidance explains that PST also applies to the purchase itself for taxable assets such as equipment, while goodwill, accounts receivable, inventory bought for resale and real property are not taxable. If the seller does not charge PST on taxable assets, the buyer must self-assess it.

WorkSafeBC premiums

Under section 256 of the Workers Compensation Act, when there is a change of ownership or employership in an industry, WorkSafeBC may levy any deficiency in an assessment on any of the successive owners or employers. Unless the owners agree otherwise, the assessment is divided between them in proportion to the payroll in each period of ownership.

In practice, a buyer should ask the seller to show that its WorkSafeBC account is registered and in good standing. WorkSafeBC issues clearance letters confirming that a business is registered and paying its premiums. The purchase agreement should also say who bears any amount assessed later for the period before closing.

Employees and their service

Section 97 of the Employment Standards Act provides that if all or part of a business is disposed of, the employment of an employee of the business is deemed to be continuous and uninterrupted by the sale. If you keep the seller's staff, their years with the seller count when you work out obligations that depend on length of service.

That matters most for compensation for length of service. Under section 63 of the Act, after three consecutive years of employment the liability is three weeks' wages plus one week for each additional year, up to a maximum of eight weeks. An employee who has worked for the seller for many years may arrive with a significant entitlement already built up. Unpaid wages and vacation pay owing at closing also need to be identified and dealt with.

Other debts to check

• Federal taxes. GST/HST and payroll remittances owed by the seller are another area for due diligence, especially in a share purchase where the company itself owes them.
• Secured creditors. A lender may hold registered security over the assets you are buying. A search of the BC Personal Property Registry shows what is registered, and the purchase agreement should require any security to be discharged at closing.
• Leases and contracts. If you take over a lease or supply contract, you may take on arrears or obligations under it.

Our due diligence checklist for buying a business in BC lists the searches and documents to request.

Tools that protect the buyer

• Clearances before closing. Make delivery of the PST clearance certificate and evidence of WorkSafeBC good standing conditions of closing.
• Holdbacks. Keep back part of the price for an agreed period to cover liabilities that surface after closing.
• Indemnities. Have the seller (and, where appropriate, its owners personally) promise to cover pre-closing liabilities. An indemnity is only as good as the person giving it, which is why it is often paired with a holdback.
• Clear allocation in the agreement. Spell out which liabilities you are assuming, such as specific contracts, and state that all others stay with the seller.

Buying a business? Find out which debts could follow it

Our business purchase and sale lawyers can identify where the seller's liabilities could reach you, request the right clearances, and draft the holdbacks and indemnities that deal with what is left.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.