An indemnity basket is the minimum dollar amount of loss a buyer’s indemnity claims have to accumulate under a Canadian share or asset purchase agreement before the buyer can recover anything at all.
An indemnity basket is a negotiated contract term, not a statutory one — nothing in Canadian corporate or tax law requires a purchase agreement to include one. As Treadstone Law puts it, “the basket is a floor: a minimum amount of loss that has to accumulate before a claim counts at all.” Below the basket, a loss simply does not count toward a claim, however genuine it is.
Two structures decide what happens once the basket is cleared, and they produce very different recoveries. Treadstone Law draws the line: with a tipping basket, “the buyer can recover the full amount of all qualifying losses, from dollar one — the threshold simply has to be ‘tipped’ over.” With a true deductible, “the buyer can only recover the amount by which losses exceed the threshold, not the threshold amount itself.” The basket size is negotiated purely between the parties — there is no default figure set by any Canadian statute, so which structure applies has to be spelled out in the agreement itself.
Suppose a buyer and seller negotiate a $3,000,000 share purchase agreement with a $30,000 tipping basket. After closing, the buyer discovers a warranty breach that costs $45,000 to remedy. Because $45,000 clears the $30,000 threshold, the tipping-basket structure lets the buyer recover the full $45,000, not just the $15,000 above the line. Had the parties instead agreed to a true deductible on the same facts, the buyer could recover only the $15,000 excess ($45,000 − $30,000), and would have to absorb the first $30,000 itself.
See also: Indemnity cap, Survival period
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