How Unpaid Source Deductions and HST Follow a Share Purchase in Ontario

Payroll source deductions and collected HST are not ordinary business debts — tax law treats them as amounts a corporation holds for the government, not money that belongs to the business itself. When a corporation falls behind on remitting them, that shortfall doesn't disappear in a sale. Unpaid source deductions and HST in a share purchase generally travel with the corporation, straight into the buyer's hands.

This is one of the sharper edges of buying shares instead of assets, and it's a due diligence item that deserves specific attention rather than a general glance at the financial statements.

What Source Deductions and HST Actually Are

When an employer pays wages, it withholds amounts for income tax, CPP, and EI from each paycheque and is required to remit those amounts to the Canada Revenue Agency. Similarly, a business that charges HST on its sales collects that tax on the government's behalf and is required to remit it, generally net of HST paid on its own business expenses. In both cases, the corporation is essentially acting as a collector for the CRA, not spending its own money.

When a corporation fails to remit these amounts on time — sometimes because of a cash-flow crunch — the shortfall doesn't vanish. It becomes a debt the corporation owes the CRA, and tax law gives the CRA strong collection tools and priority in respect of these specific amounts, reflecting the fact that the money was never really the corporation's to spend.

Why This Matters More in a Share Purchase

In a share purchase, you're buying the same corporation that owes the money. The debt to the CRA doesn't ask who owns the shares — it stays with the corporate taxpayer. If the seller understated or didn't know about the full extent of a remittance shortfall, the buyer can find out about it only after closing, when the CRA comes calling.

In an asset purchase, by contrast, the buyer generally isn't taking on the seller's corporate tax debts, since those stay with the selling entity rather than transferring along with specific assets. That said, buyers shouldn't assume an asset purchase makes tax debt entirely irrelevant — where a seller transfers assets while owing money to the CRA, especially in circumstances that aren't at arm's length or for less than fair value, this can raise separate legal questions worth flagging to your lawyer and accountant rather than assuming away.

What Due Diligence Should Cover

• [ ] Confirm the corporation's history of remittances for source deductions and HST
• [ ] Review recent CRA correspondence, assessments, or reassessments
• [ ] Check for any payment arrangements or outstanding balances with the CRA
• [ ] Confirm payroll records match what was actually remitted
• [ ] Ask specifically about any known compliance issues, not just what shows up in the financial statements

Tax filings and compliance are a standard part of due diligence on any business purchase — this is simply the specific version of that review that matters most in a share deal.

Protecting the Buyer Contractually

• Representations and warranties confirming the corporation is current on its remittances and filings, backed by a disclosure schedule for any known exceptions.
• Indemnities specifically addressing tax liabilities discovered after closing, often treated with fewer limitations than general indemnities given how serious this exposure can be.
• Holdbacks or escrow, sized to reflect the specific risk where diligence raises any doubt about the corporation's compliance history.
• Price adjustments, where a known shortfall is quantifiable before closing and can simply be reflected in the purchase price instead of handled through a post-closing claim.

Frequently asked questions