Anonymised, illustrative composite. The buyer was acquiring an equipment-rental business with real contracts, real equipment, and real revenue. What it was not acquiring, on paper, was anyone to run it.
At a glance
A buyer agreed, subject to diligence, to acquire 100% of the shares of an equipment-rental company that operated as one half of a two-company group under common ownership. The other half, a services company with 40 employees, was not part of the deal. Combined group revenue was $14 million — $9 million from the services company, $5 million from the rental company — and the two had operated, in practice, as a single business for years.
Employment diligence on the target being sold found that the equipment-rental company had no employees of its own. All 12 people who actually ran it — dispatchers, technicians, the branch manager — were on the services company’s payroll, seconded informally to the rental side of the business without any documentation splitting their time or their employment relationship between the two entities. A buyer acquiring the rental company’s shares alone would have acquired equipment, customer contracts, and revenue — and nobody with a legal employment relationship to the company that owned any of it.
A related issue surfaced alongside it. Because the two companies were commonly controlled, they were associated corporations for tax purposes, and ITA s.125(2) sets a single $500,000 business limit — the ceiling on income eligible for the small business deduction’s preferential 19% rate — to be shared, not duplicated, across all associated CCPCs. Both companies had been filing as though each had its own separate $500,000 limit, exposing the group to reassessment on the excess at the general corporate rate rather than the preferential small-business rate.
The workforce problem was fixed structurally, not financially: the 12 operating employees were formally transferred onto the rental company’s own payroll two weeks before closing, under a documented employment-transfer agreement. Ontario’s Employment Standards Act treats this kind of transfer, where “the business the employee works for is sold or transferred in any other way to a new owner and the employee continues to work in the business for the new owner,” as continuous employment: length of service “flows through” to the new employer rather than restarting, per Ontario’s own guide to the ESA.
The stakes are concrete for a real employee. Ontario’s statutory notice table runs from 1 week under a year of service up to 8 weeks at 8 years or more. One of the 12, a technician with 9 years of combined service between the two companies, would have been entitled to 8 weeks’ notice on a termination if his service properly carried through the transfer. Had the transfer not been documented as a continuity of employment — had he instead simply been handed a new offer letter and treated as a new hire of the rental company — a termination a year later would have entitled him to only 2 weeks, not 8, on the same underlying job and the same underlying tenure.
The ESA’s continuity-of-employment provisions did the legal work of preserving the employees’ standing without requiring anyone to negotiate new terms with each of the 12 individually — the transfer agreement simply had to be structured as what it was, a continuation of the same jobs under a new corporate employer, rather than a termination and rehire. On the tax side, s.125’s associated-corporations rule did not change how much the group actually owed in the aggregate; it changed how the shared $500,000 limit had to be allocated between the two companies going forward, and flagged the prior years’ separate claims for review.
Had the deal closed with the rental company’s shares changing hands and the 12 employees left where they were, the buyer would have owned a company with equipment and contracts but no one legally employed to run it from day one — forcing an emergency rehire under new terms, at the buyer’s cost and on the buyer’s timeline, of the very people who already knew the job. And for each of them, the years of service that should have carried through the transfer would instead have reset to zero, understating what they were legally owed on any future termination by a wide margin, as the notice-table arithmetic above shows for even a single employee.
The tell is an org chart that does not match a payroll register. A diligence team that reviews the target company’s own financial statements and employment records in isolation, without asking who actually reports to whom day-to-day and cross-checking that against which entity issues each person’s T4, will not catch that the company being sold has no payroll of its own at all — because nothing in its own books says so.
The 12 employees transferred to the rental company’s payroll under a documented continuity-of-employment agreement two weeks before closing, and the deal closed with a fully staffed operating company. The associated-corporations finding was flagged separately to the seller’s tax advisors for the years predating the sale, outside the scope of the transaction itself.
Related case files
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