Checking for Tax Arrears Before You Buy a Business in Ontario

A business can look financially healthy on paper — steady revenue, reasonable margins, a clean-looking balance sheet — and still be sitting on unpaid corporate income tax, HST, payroll source deductions, or municipal property tax. Tax arrears don't always show up clearly in the documents a seller volunteers, and depending on how your deal is structured, they can become your problem the moment the transaction closes.

This article explains where tax arrears come from, how a buyer uncovers them, and why the difference between an asset sale and a share sale matters so much to how much exposure you're actually taking on.

Where Undisclosed Tax Debt Typically Comes From

• Corporate income tax — unpaid or reassessed amounts from prior tax years, sometimes stemming from a dispute the seller hasn't resolved.
• HST/GST — collected but not remitted, or reassessed after an audit finds under-reported sales.
• Payroll source deductions — amounts withheld from employee pay for income tax, CPP, and EI that were never remitted to the government. This category carries particularly serious personal liability risk for directors, which is one reason it deserves close attention.
• Municipal property tax — arrears on real property the business owns or occupies, which can attach to the property itself.
• Amounts under audit or dispute — a filed but contested reassessment that hasn't yet been resolved, which may not appear as a hard liability on the financial statements at all.

Some of these arise from genuine oversight or cash flow trouble; others surface only once the CRA or a municipality completes a review that hasn't happened yet at the time of your due diligence.

How to Investigate Before You Sign

1. Request recent tax filings — corporate income tax, HST, and payroll remittance filings — for a representative historical period, and compare them against the financial statements for consistency.
2. Ask for proof of payment, not just proof of filing. A return can show tax was calculated and reported without confirming it was actually paid.
3. Request any CRA or Ministry of Finance correspondence regarding audits, reassessments, payment plans, or liens.
4. Search for registered liens or judgments against the corporation, which can reveal enforcement action already taken over unpaid tax debt.
5. Ask direct questions of the seller and their accountant about any ongoing disputes, audits, or payment arrangements — and get the answers in writing where possible, since verbal assurances are hard to rely on later.
6. Confirm property tax status directly with the relevant municipality if the deal includes real property or a long-term lease with tax obligations.

Why Deal Structure Changes Your Exposure

This is one of the clearest illustrations of why the choice between an asset sale and a share sale matters — the legal consequences of undiscovered tax arrears are materially different depending on which structure you use.

Protecting Yourself in the Purchase Agreement

Even with thorough due diligence, tax problems can surface after closing that neither side knew about at signing. A well-drafted purchase agreement addresses this through:

• Specific representations and warranties confirming the target has filed and paid all required taxes, with no outstanding assessments or reassessments the seller hasn't disclosed.
• Indemnities obligating the seller to compensate the buyer for tax liabilities relating to the pre-closing period, if they later surface.
• A holdback or escrow, where a portion of the purchase price is withheld for a period after closing specifically to cover this kind of risk.
• Excluded liabilities language, in an asset sale, that makes explicit which tax obligations the buyer is not assuming.

None of these tools eliminate the need for due diligence — they're a backstop for what diligence doesn't catch, not a substitute for it.

Frequently asked questions