Buying a business means buying its tax history, at least to some degree, depending on how the deal is structured. Tax due diligence helps a buyer understand what they’re inheriting before closing, rather than finding out after the fact. Here’s what that process generally involves.
What to Review During Tax Due Diligence Before Buying a Business
Confirm Whether the Deal Is Structured as an Asset Purchase or a Share Purchase
This decision shapes almost everything else in the due diligence process. In a share purchase, the buyer acquires the corporation itself, including its full tax history, past filings, and any outstanding liabilities. An asset purchase is generally more insulated from the seller’s prior tax issues. However, it isn’t automatically risk-free, and the specific protections available can depend on how the deal is structured.
Request a Clearance Certificate Before Closing
A clearance certificate from the CRA is one of the main tools buyers use to protect against certain successor liability for a seller’s unpaid taxes. The specific process and certificate type can depend on factors like whether the seller is a Canadian resident or a non-resident, since non-resident sellers trigger a different set of rules entirely. This is an area where the details matter a great deal, and it’s worth having The Tax Whiz confirm exactly what applies to your specific transaction.
Review GST/HST Compliance and Filing History
GST/HST obligations are separate from income tax and carry their own compliance history worth reviewing, including whether returns have been filed consistently and whether any amounts remain outstanding. Gaps here can carry their own risk depending on how the deal is structured, separate from anything found in a review of income tax filings alone.
Check Payroll Source Deduction Compliance
If the business being acquired has employees, unremitted payroll source deductions warrant specific attention, since they can carry a different liability profile than general corporate tax debt, depending on the circumstances. Reviewing recent remittance history is standard in thorough tax due diligence.
Review Corporate Tax Filing History and Any Outstanding Reassessments
Review recent T2 filings, along with whether the CRA has any audits, reassessments, or disputes in progress, to gauge whether the tax picture is settled or still an open question. An unresolved reassessment can represent a liability that isn’t fully known until it’s actually resolved, which is worth factoring into deal timing and terms.
Understand How Tax Attributes Transfer (or Don’t) With the Deal Structure
Things like non-capital loss carryforwards and other tax pools may or may not transfer to a buyer depending on how the transaction is structured, and the rules around this can be intricate. Deal structure and the specific tax attributes involved both matter, so it’s worth confirming with The Tax Whiz early rather than assuming a particular outcome.
Get Expert Guidance Through Every Step of Tax Due Diligence, Only at The Tax Whiz
Tax due diligence touches deal structure, CRA compliance history, GST/HST, payroll obligations, and how tax attributes carry forward, and getting any one of these wrong can turn into an expensive surprise after closing. None of it replaces a proper review by someone who knows exactly what applies to your specific transaction.
The Tax Whiz provides reliable, CRA-compliant tax services for buyers navigating exactly this kind of transaction, helping confirm what’s actually at stake before a deal closes rather than after. Reach out to The Tax Whiz to work through tax due diligence for your specific deal.
Frequently Asked Questions
What’s the difference between tax due diligence for an asset purchase versus a share purchase?
A share purchase generally means taking on the target corporation’s full tax history and any associated liabilities. In contrast, an asset purchase tends to offer more insulation from a seller’s prior tax issues, though the specific protections available depend on the transaction’s details. Consult The Tax Whiz to understand what applies to your specific deal.
What happens if I buy a business without getting a clearance certificate?
Depending on the circumstances and how the deal is structured, a buyer may face exposure to certain unpaid tax liabilities of the seller. The specific facts matter significantly, so it’s worth confirming the right approach before closing rather than after.
Do non-resident sellers trigger different tax rules?
Yes, transactions involving a non-resident seller are subject to different rules than transactions with a Canadian resident seller. This is a case where early professional guidance matters.
How long does the tax due diligence process typically take?
Timing depends on the business’s complexity and how quickly you can obtain documentation and CRA confirmations so it can vary significantly from one transaction to the next.