A due diligence checklist tells a buyer what to review. It doesn’t always prepare them for what actually turns up. Certain tax issues show up often enough in real transactions that they’re worth knowing about specifically, before they surface as a surprise mid-deal.
The Tax Risks That Come Up Most Often During Due Diligence
Unremitted Source Deductions and GST/HST Shortfalls
This is one of the most frequently cited issues in tax due diligence: payroll source deductions or GST/HST amounts that were collected but not properly remitted to the CRA. These shortfalls don’t always show up clearly in a target company’s financial statements, and depending on the deal structure, they can create liability for a buyer that goes beyond a simple reduction in purchase price.
Outstanding Tax Arrears the Seller Hasn’t Disclosed
Tax debts sometimes don’t surface until a buyer specifically requests confirmation from the CRA or reviews account statements directly, rather than relying on what a seller reports. A seller isn’t necessarily being dishonest by omission; arrears can exist without being top of mind, but a buyer who doesn’t independently confirm this is relying on an assumption rather than a fact.
Late or Inconsistent Filing History
A pattern of late T2 or GST/HST filings is rarely isolated. It often points to broader gaps in how the business has handled its tax and accounting obligations generally, which makes it worth treating as a signal to look more closely elsewhere, not just a minor administrative lapse on its own.
Aggressive or Questionable Tax Positions
Some businesses take tax positions that reduce their tax burden but sit in a grey area the CRA could challenge on reassessment. A buyer doesn’t inherit those decisions in the abstract; they can inherit the risk of reassessment after the deal closes, depending on how the transaction is structured. This is an area where a closer read of past filings and any correspondence with the CRA matters more than it might seem.
Related-Party Transactions That Aren’t Properly Documented
Transactions between a business and related parties, shareholders, family members, or affiliated companies, need to reflect arm’s length terms and be properly documented. When they aren’t, it can create exposure that only becomes clear on closer review, particularly for cross-border related-party arrangements, where transfer pricing rules add another layer of complexity.
Financial Reporting Inconsistencies That Mask the Real Tax Picture
Monthly results that don’t reconcile cleanly, unusual accounting treatments, or financials that seem to shift depending on who’s asking can signal that the tax picture underneath isn’t as settled as it looks. These inconsistencies don’t always point directly to a tax problem, but they’re often where one gets found once someone looks closely enough.
Spot Tax Risks Before They Become Your Problem, Only at The Tax Whiz
None of these risks are reasons to walk away from a deal on their own. They’re reasons to look closely before signing anything, so a buyer knows what they’re actually taking on rather than finding out after the fact. Catching these issues early gives room to adjust price, terms, or structure before they become permanent.
The Tax Whiz provides reliable, CRA-compliant tax services to help buyers identify exactly these kinds of risks before a deal closes. Reach out to The Tax Whiz to have your specific transaction reviewed before you commit.
Frequently Asked Questions
What’s the most common tax red flag buyers find during due diligence?
Unremitted source deductions and GST/HST shortfalls come up frequently in due diligence reviews, often because they aren’t clearly visible in standard financial statements without a closer look.
Can a buyer be held responsible for a seller’s past aggressive tax positions?
Depending on how the deal is structured, a buyer may inherit exposure to positions the CRA later reassesses, which is why reviewing past filings and any CRA correspondence closely matters. Consult The Tax Whiz to understand how this applies to your specific transaction.
How do related-party transactions create tax risk in a deal?
When transactions between a business and related parties aren’t properly documented on arm’s-length terms, they can create exposure that surfaces during a closer review, particularly in cross-border situations where transfer pricing rules apply.
What should I do if I find a tax risk during due diligence?
It depends on the specific issue and its significance, but options generally include adjusting the purchase price, changing the deal structure, or requesting specific protections in the agreement. This is exactly the kind of decision worth making with professional guidance, not on your own.