Tax Indemnities in an Ontario Share Purchase Agreement: Why Buyers Insist on Them

When you buy the shares of an Ontario corporation, you are not just buying its assets and goodwill — you are buying its entire tax history, known and unknown. An unpaid remittance, a questionable deduction from three years ago, or a CRA reassessment that has not landed yet all become yours the moment the shares change hands. That is why a tax indemnity in the share purchase agreement is one of the most heavily negotiated clauses in the entire deal.

Buyers who rely only on the deal's general indemnity often discover, too late, that ordinary limits — caps, minimum claim thresholds, and short survival windows — were never designed to handle a tax liability that can surface years after closing. A properly drafted tax indemnity is meant to fill that gap.

This article explains what a tax indemnity actually promises, why it is treated differently from the rest of the indemnity package, and what both sides typically negotiate before signing.

Why Share Deals Carry Built-In Tax Risk

In a share purchase, the corporation itself changes owners — its shares move from seller to buyer, but the corporation stays exactly as it was. All of its historical contracts, liabilities, and obligations, known and unknown, come along with it unless the purchase agreement specifically addresses them through representations, warranties, indemnities, and price adjustments.

Tax exposure is a sharp version of this problem:

• Corporate tax filings from prior years remain open to CRA review long after closing.
• HST/GST remittances, payroll source deductions, and instalment payments made before closing can all turn out to be wrong.
• CRA pursues the corporation itself for any shortfall it finds — not the seller personally.

This is different from an asset purchase, where the buyer generally acquires specific assets and assumes only the liabilities it agrees to assume, leaving most historical corporate tax exposure behind with the selling entity.

What a Tax Indemnity Actually Promises

A tax indemnity is a specific, standalone promise from the seller to compensate the buyer (or the corporation itself, after closing) for tax liabilities relating to periods before closing that were not known, quantified, or accounted for when the deal was priced.

It typically sits alongside — not instead of — the agreement's:

• General representations and warranties about the corporation's tax filings and compliance
• Closing conditions and covenants
• Disclosure schedule, where the seller lists known tax issues so they are excluded from later claims
• General indemnity provisions covering breaches of the representations more broadly

Why General Indemnities Aren't Enough on Their Own

General indemnity packages are usually built around baskets (a minimum loss before a claim can be made), caps (a maximum total recovery), and survival periods (a window after which claims can no longer be brought) calibrated for ordinary commercial risk — a mis-stated inventory count, an undisclosed contract dispute, and so on.

Tax risk does not fit that mould well:

• A CRA reassessment can arrive well after an ordinary survival period would have expired.
• A single reassessment can be large relative to deal size, in a way a modest basket or capped indemnity was not built to absorb.
• The buyer usually cannot independently verify every historical filing before closing — it relies heavily on the seller's own records and representations.

For these reasons, buyers routinely negotiate for the tax indemnity to survive longer than the general indemnity, and to sit outside (or only partly inside) the general basket and cap — though exactly how far a seller will agree to go is always a negotiated outcome, not a fixed rule.

Due Diligence That Supports the Tax Indemnity

A tax indemnity is not a substitute for due diligence — it is a backstop for whatever due diligence does not catch. Standard tax due diligence generally reviews:

• [ ] Federal and provincial corporate tax returns and notices of assessment or reassessment
• [ ] HST/GST filing and remittance history
• [ ] Payroll source deduction compliance
• [ ] Outstanding tax instalment payments
• [ ] Any correspondence with the CRA about audits, disputes, or ongoing reviews
• [ ] Prior corporate reorganizations or amalgamations that could carry tax consequences

Anything this review turns up should land on the disclosure schedule — which then shapes exactly what the tax indemnity is meant to cover going forward.

Common Negotiation Points

Frequently asked questions