What happens if a seller's numbers look fine but their tax filings tell a different story?

A mismatch between the internal financial statements a seller shows you and what was actually reported to the Canada Revenue Agency is one of the most serious red flags in a business sale, and it deserves to stop the process until it's explained. Internal books that show stronger revenue or profit than the tax filings can mean the tax filings understated income (a compliance and successor-liability concern for you if the CRA later reassesses), or it can mean the "internal" numbers were inflated for the sale (a valuation and fraud concern) — either explanation should worry a buyer.

Because this discrepancy can point in more than one direction, don't assume the more flattering story. Ask the seller's accountant directly to reconcile the two sets of numbers, and treat an unwillingness or inability to do so as significant information in itself, not just an inconvenience.

Your purchase agreement should include representations about the accuracy and consistency of financial statements and tax filings, backed by an indemnity, so you have recourse if this turns out to be worse than it first appears. A Treadstone business lawyer can help structure those protections.