Checking for Unpaid CRA, GST and Payroll Debts Before Buying (Alberta)

When you buy a business, you want to know whether the seller owes the Canada Revenue Agency money for GST, payroll source deductions or corporate tax. Those debts can affect the value of what you are buying and, depending on how the deal is built, may become your problem.

This article covers the GST rules for business sales in Alberta, how to look into the seller's tax position, and how to protect yourself in the agreement. Whether a particular debt follows the business depends on the facts, so confirm it with a lawyer or accountant.

This article covers the law of Alberta.

Why unpaid tax debts matter to a buyer

Taxes owed by the seller are a hidden cost. Unpaid GST, payroll deductions withheld from employees' pay, or corporate income tax are all worth checking before you close, and how any of them affects you depends on your situation. A buyer could face questions about the business's assets, or a surprise after closing.

Whether the debt stays with the seller or reaches you depends on the structure. In a share purchase you buy the shares of the company rather than selected assets, and how the company's existing tax position affects you depends on the facts. In an asset purchase you generally buy selected assets rather than the company itself, and how a seller's tax debts apply to that depends on the facts. A lawyer or accountant can tell you how this applies to your deal.

How GST works in a business sale

The business-assets rule under Excise Tax Act s.167(1) applies where a supplier sells a business or part of one and the buyer gets all or substantially all of the property that can reasonably be regarded as necessary to carry on that business.

Without an election, each property and service in the sale is treated as a separate supply with consideration allocated to it, so GST (5% in Alberta) can apply to the taxable parts. Alberta has no provincial sales tax.

The going-concern exemption works through a joint election by the supplier and the recipient, made in the prescribed form with the prescribed information. If the election is valid, no tax is payable on the supplies under the agreement, except that tax is still payable on a taxable service the supplier will render, on a taxable lease, licence or similar supply of property, and, where the buyer is not a registrant, on a taxable sale of real property. The CRA form is GST44, 'GST/HST Election Concerning the Acquisition of a Business or Part of a Business'.

Limits on the GST election

• The election is not available where the supplier is a registrant and the recipient is not a registrant.
• Even with a valid election, tax is still payable on a taxable service the supplier will render, on a taxable lease, licence or similar supply of property, and, where the buyer is not a registrant, on a taxable sale of real property.
• If the buyer is a registrant, it must file the election with the Minister by the filing deadline for its first reporting period in which tax would otherwise have become payable. The Minister may accept a later date on the buyer's application.
• Under s.167(2), no tax is payable when an estate transfers a deceased person's business property to a beneficiary who is a registrant, if the property was used in the business immediately before death, the transfer follows the will or succession laws, the beneficiary takes it for commercial activities, and both jointly elect.

Check the filing instructions on the CRA form itself before relying on any deadline, and have an accountant confirm that your GST treatment is right.

Checking the seller's tax position and protecting yourself

Registry searches cover corporate and personal property records, and tax matters call for a different approach. Instead, you ask for proof and use the agreement to manage the risk. Which CRA confirmations are useful for your deal, who needs to request them and how long they take depends on your situation, so it is worth confirming with a lawyer or accountant.

• Ask for recent GST returns, payroll remittance records and corporate tax filings and notices of assessment.
• Have an accountant review whether returns are filed and amounts paid.
• Ask the seller for written confirmation of the CRA account balances.
• Include a warranty that all taxes are paid and a promise to reimburse you for earlier tax debts.
• Consider holding back part of the price until tax matters are confirmed.
• Confirm whether a GST44 election applies and who will file it.

Personal Property Registry searches can be made by business debtor name or by serial number, and are requested on a Search Request form at any registry agent office in Alberta. What a result means for your deal is worth confirming with a lawyer.

What to do next

Raise tax concerns early, ideally before you sign a letter of intent or purchase agreement. A seller who has paid everything should have no trouble providing records.

• Speak with an accountant about the seller's returns and the GST treatment of the deal.
• Speak with a lawyer about how to structure the purchase and what protections to write into the agreement.
• Calendar the GST election filing date if you are a registrant buyer.
• Re-check the position close to closing.

Frequently asked questions