Buying a Business in Ontario: Financial and Tax Guide

90% of all startups fail, 10% within the first year, and 70% between years two through five. 

These stats show that starting a business from scratch can be unpredictable. Therefore, most business buyers consider purchasing an existing business with existing revenue and loyal customers.

However, buying a business in Ontario still comes with risk if the deal structure, tax implications, and financing terms aren’t handled correctly.

This guide highlights the types of business purchases in Ontario, the steps to purchasing a business, and the costs to expect. We’ll also dive into the tax considerations. 

TL;DR – Buying a Business in Ontario Checklist

Want a quick rundown of the steps to buying a business in Ontario? 

Here are the 8 crucial steps: 

1. Define your acquisition criteria and budget
2. Find and evaluate potential businesses
3. Get a professional business valuation
4. Conduct financial and legal due diligence
5. Negotiate the letter of interest and purchase structure
6. Structure the deal as an asset or share purchase
7. Secure financing for the acquisition
8. Sign the purchase agreement and close

Even with these steps, you should not leave the process of buying a business to chance.

At JS CPA Strategic Solutions, our Growth Mosaic Strategy integrates M&A advisory, fractional CFO services, exit planning, and tax structuring. We advise on tax-efficient acquisition strategies and ensure transactions are correctly structured.

Schedule a consultation today to ensure your deal protects your interests.

Types of Business Purchases You Can Make in Ontario

The structure you choose will affect your tax implications, financing, and the debt you acquire.

Here’s a breakdown of the different types of business purchases:

Types of Business Purchase	What It means	Buyer Advantages	Buyer Disadvantages
Asset Purchase	You purchase specific assets, such as equipment and intellectual property, rather than the entire corporation.	You can allocate the purchase price to specific assets and claim higher depreciation deductions. You don’t acquire any debts or liabilities.	You may have to pay provincial sales tax (PST) or GST/HST on the purchase.
Share Purchase	You acquire the corporation’s shares and become the owner of the entire entity.	You’re not subject to GST/HST taxes. You may use the corporation’s tax attributes, such as non-capital losses and investment tax credit carry-forwards.	You inherit the company’s tax debts, liabilities, and legal issues.
Franchise Acquisition	You buy an existing franchise business that operates under an established brand and system.	You get immediate access to the established brand and customer base.	You incur reduced profits due to ongoing royalty payments and marketing fees.
Management Buyout (MBO)	You’re an existing manager or employee, and you purchase the business from the current owner.	You get a smooth transition because you know the business.	You can face complex financing.

Step-by-Step on How to Buy a Business in Ontario

You should understand the process for buying a business while checking the legal checkpoints that matter. 

Here are the 8 steps to follow:

1. Define Your Acquisition Goals and Budget

You should define your goals, budget, and long-term vision.

Start by narrowing down:

• The industries you understand.
• The size of business you can realistically finance.
• The level of day-to-day involvement you want.
• The geographic areas you can actively manage.

Consider merger and acquisition services to assess acquisition risks and identify the right target.

2. Identify and Evaluate Potential Businesses

Some of the best acquisitions are never public listings. You should therefore find a business to acquire through brokers, networks, and direct outreach. 

Besides, consider marketplaces and online listing platforms, such as Business2Sell and Zonado.

3. Book an Independent Business Valuation

You should confirm whether a business you’ve got an eye on is priced fairly by obtaining a professional business valuation.

Some of the valuation methods may include:

• EBITDA multiples for larger companies.
• Seller’s Discretionary Earnings (SDE) for owner-operated businesses.
• Asset-based approaches for businesses with significant equipment or inventory.

4. Complete Financial, Legal, and Tax Due Diligence

Before you close your deal, you should consider a due diligence checklist to review the finances, taxes, and legal issues.

Here are some areas to cover:

• Verify financial statements to assess the business’s financial health.
• Review the target company’s tax profile to identify potential tax exposures and compliance issues.
• Check if the business is legally compliant, whether it’s intellectual property (IP) or customer contracts.

5. Negotiate the Letter of Intent and Agree on Key Deal Terms 

Once you’ve narrowed down a target, you can formalize your interest in buying the business through a Letter of Intent (LOI). 

While it is not the final contract, this step is where the deal can gain or lose momentum.

The LOI typically outlines the:

• Structure of the deal.
• Proposed purchase price.
• The scope of the due diligence.
• Exclusivity of the deal during the LOI period.
• Key conditions that must be satisfied before closing, such as regulatory approvals.

6. Choose the Right Structure

You should weigh in the tax consequences of each purchase structure.

As we’ve explored above, you can choose an asset purchase if you don’t want to inherit unknown liabilities and you want to select the assets you want.

You can also consider a share purchase if you want to assume the existing customer relationships and goodwill.

7. Secure Financing for the Acquisition

You need a financing plan to purchase a business in Ontario. Common options include:

• Bank loans that you can secure with company assets and/or based on the free cash flow to service the debt. Depending on the size of the funding you need, consider equity financing.
• BDC financing to purchase existing businesses.
• Vendor take-back (VTB) financing, where the seller acts as a lender and accepts payments over time.
• Canada Small Business Financing Program (CSBFP) to obtain loans offering up to $IM for real property and assets.

8. Finalize the Purchase Agreement and Close the Deal

The Purchase Agreement finalizes the terms you’ve negotiated and makes the deal legally binding. It can be set up as either an Asset Purchase Agreement or a Share Purchase Agreement.

Before closing, both parties work through any unclear conditions. Once these conditions are met, closing takes place, and legal ownership officially transfers to the buyer. 

How to Choose the Right Business to Buy in Ontario

The business you buy will affect the venture’s long-term profitability.

Here’s how you should screen a business to find the right fit:

• Review Financial Health: Look at revenue and profit trends over at least 3 years. Consistent or steadily growing revenue is often a stronger sign than sudden spikes that may not be sustainable long term. 
• Focus on Adjusted EBITDA: Evaluate earnings qualitatively using adjusted EBITDA to get a clear picture of the business’s true operating performance.
• Check Customer Concentration: Ideally, none of your clients should account for more than 30% to 40% of total revenue. You should look for a company with a balanced profile, in which no customer accounts for more than 40% of revenue.
• Look at Owner Dependence: If the owner handles all sales, operations, or customer relationships personally, the transition may become difficult after closing. That’s because it lacks a document system and a capable team to support you post-acquisition. 
• Review Recurring Revenue: Consider businesses with recurring revenue from subscriptions, contracts, or repeat customers. This creates more predictable cash flow and reduces volatility.
• Confirm Industry Fit: Choose a business in an industry you are familiar with, or that you can realistically manage. This helps you avoid mistakes and make better decisions.

Costs to Expect When You Buy a Business in Ontario

Buying a business in Ontario requires you to consider more than the purchase price. 

Here are the costs you should budget for:

1. Purchase Price: The largest cost component, typically 85-95% of the total transaction value. It’s determined by the business’s risk profile, earnings quality, and growth potential.
2. Closing Costs: These cover drafting documents, structuring the sale, and finalizing the purchase agreement, all of which are essential for a smooth transfer of ownership and legal protection.
3. Professional Fees: These are the costs for hiring an M&A advisory firm. These experts can assist you with the LOI, negotiate the price agreement, and conduct the due diligence.
4. Lender Fees: Banks and other financing institutions, such as BDCs, typically charge origination and structuring fees. These are usually between 1 percent and 3 percent of the loan value, depending on risk profile.
5. Taxes: Depending on the structure, you will have to pay taxes. For example, HST may apply to an asset sale unless an election is filed. If real estate is included, the Ontario Land Transfer Tax may also apply.
6. Post-close Working Capital: The cash you need to run the business during the first 60 to 90 days after the purchase. It covers payroll, supplier payments, inventory, and other expenses.

Tax Considerations for Ontario Business Buyers

When buying a business in Canada, taxes affect both the deal structure and its long-term profitability.

The following table breaks down the taxes Ontario business buyers should consider.

Tax Considerations	Explanation	What You Should Know as a Buyer
Harmonized Sales Tax (HST) and Goods and Services Tax (GST)	As a buyer, you may need to pay 13% HST upfront on taxable assets in Ontario. The 13% combines the 5% GST and 8% provincial sales tax.	If you’re buying all or 90% of the assets, you and the seller may jointly file Form GST44 to avoid charging HST on transferred business assets.
Provincial Retail Sales Tax (RST)	If you purchase certain specified vehicles privately, you pay 13% RST on the purchase price or the vehicle’s wholesale value, whichever is greater. You’ll also pay 8% RST on certain insurance and benefits plan premiums.	There’s no standalone PST in Ontario, unlike in other provinces.
Depreciation and Capital Cost Allowance (CCA)	You can deduct the cost of depreciable assets over time for tax purposes, subject to asset-class rules.	You should break your purchases into capital classes to determine the CCA rates, which range from 4% to 30%.
Ontario Land Transfer Tax (LTT)	You’ll pay land tax rates depending on the property’s value and location. For example, 2.5% on amounts exceeding $2 million. If you’re a non-resident and purchasing property within the Greater Golden Horseshoe (GGH), you may be required to pay 15% non residential speculation tax (NRST) in addition to the land transfer tax.	You need to account for LTT as closing costs and understand when you can avoid it, such as when purchasing a newly built home.
Federal and Ontario Tax Rates	After acquisition, your business profits are taxed at 9% federal rate tax rate and 11.5% Ontario tax rate on the first $500,000 of active business income.	You need corporate tax planning for both personal and corporate tax, as well as dividend optimization.
Payroll Taxes	You inherit employer obligations, such as the Canada Pension Plan (CPP) and Employment Insurance (EI). The rates differ. For example, the Employee Health Tax (EHT) is usually set at a rate of 0.98% to 1.95% in Ontario.	You should conduct proper due diligence to ensure the business complies with CRA payroll requirements and there are no outstanding payroll liabilities.

Frequently Asked Questions (FAQs)

Below are quick answers to the questions Ontario business buyers ask:

How Long Does It Take to Buy a Business in Ontario?

Most transactions take between 3 and 9 months from LOI to closing. 

Timelines depend on financing approvals, the complexity of due diligence, negotiation issues, and regulatory requirements.

Can a Non-Resident Buy a Business in Ontario?

Yes. 

Non-residents can buy businesses in Ontario, although larger acquisitions may trigger review requirements under the Investment Canada Act. 

Besides, if you’re buying real estate property, you may be required to pay 15% non residential speculation tax (NRST) in addition to land transfer tax.

It’s therefore recommended to consider tax and compliance services that help you structure acquisitions to minimize tax exposure. We also help you navigate the IRS and CRA regulations.

Can I Use My RRSP to Buy a Business in Ontario?

Yes, you can use funds from your RRSP to buy a business in Ontario, but there’s no specific RRSP program for business acquisitions.

Often, you’ll need to withdraw personal funds personally and invest or lend them to the business.

However, there are strict rules such as:

1. The business must be a specified small business corporation (SSBC).
2. RRSP withdrawals are generally treated as taxable income in the year you withdraw them.
3. Direct RRSP investments are restricted if you or related persons own more than 10% of the corporation’s shares.

RRSP investments can trigger significant tax consequences, so you should seek guidance from a tax advisor.

What Happens to Existing Employees After I Buy a Business in Ontario?

The fate of employees when a business is acquired in Ontario depends on the type of purchase. 

In share purchases, employees automatically remain employed. However, in asset deals, Ontario employment standards may still recognize continuity of employment under Section 9 of the ESA.

Conclusion

When buying a business in Ontario, you should verify the financials independently and understand the critical tax considerations. Make a mistake, and you could end up with compliance headaches and unexpected tax liabilities.

Working with the right financial advisor early in the process of buying a business in Ontario can help protect your interests and accelerate closing.

At JS CPA Strategic Solutions, we assist Ontario business buyers with conducting due diligence, assessing the deal structure, drafting the purchase agreements, and providing support after the acquisition is complete.

Book a consultation and let’s ensure your acquisition is compliant and set up for long-term success.