Why Buyers Want Three Years of Tax Returns Before Buying an Ontario Business

A seller's marketing summary of "last year was a great year" is not the same as a verified, filed tax return. Before making a serious offer on an Ontario business, buyers routinely ask for multiple years of tax returns — not just financial statements the seller prepared for the sale process, but what was actually filed with the Canada Revenue Agency. The gap between those two documents can be revealing.

This article explains why a multi-year history matters more than a single strong year, what to compare it against, and what it typically feeds into once you have it.

What a Single Year Can Hide

A single year of financials can be a genuinely accurate snapshot, or it can be an outlier. A strong year might reflect a one-time contract, a temporary cost-cutting push, a competitor's temporary closure, or simply favourable timing that won't repeat. Without a longer history, a buyer has no way to tell the difference between a business's normal operating level and a peak that happened to coincide with the sale process.

What Three Years Reveals

Reviewing several years of tax returns together helps a buyer see:

• Trend, not just a snapshot — is revenue and profitability growing, flat, or declining, and how consistent is that pattern year over year?
• Seasonality and cyclicality — some businesses are naturally uneven from year to year; a longer history helps separate normal variation from a real change in the business.
• The effect of one-time events — a lawsuit settlement, a large equipment purchase, a temporary government support program, or a major customer gain or loss stands out more clearly across several years than in isolation.
• Consistency with the seller's own pitch — if the seller's summary presentation doesn't line up with what was actually filed, that's a serious flag worth investigating before going further.

Tax Returns vs the Seller's Pitch

Sellers frequently prepare a summary of "normalized" or "adjusted" earnings for marketing purposes, adding back expenses they consider personal, discretionary, or one-time. Comparing that summary against the actual filed tax returns lets a buyer's accountant:

• Confirm the starting revenue and expense figures actually match what was reported to the CRA, rather than a more optimistic internal version.
• Test each proposed add-back individually against the underlying filed numbers, rather than accepting a lump-sum adjustment.
• Identify anything that appears in the sales pitch but not in the tax filings, or vice versa — a discrepancy that needs an explanation before it can be relied on.

A seller who can walk through their tax returns and reconcile them cleanly to their sales presentation is a stronger sign of a well-run business than the headline profitability number itself.

How the Numbers Feed Into Price and Structure

Once a buyer has confidence in the underlying earnings, that information typically feeds into the deal in several concrete ways:

• Valuation. Earnings-based valuation approaches depend directly on a defensible, normalized earnings figure, which starts from verified tax filings, not the seller's marketing summary.
• Working capital adjustments. The purchase agreement commonly includes a mechanism comparing an estimated closing financial position to the actual position at closing, which depends on having accurate, comparable financial history.
• Representations and warranties. A buyer can ask the seller to represent, as a term of the purchase agreement, that the tax filings and financial statements provided are accurate and complete, backed by an indemnity if that turns out to be false.
• Deal structure. For an individual seller hoping to use the Lifetime Capital Gains Exemption on a share sale, the corporation's tax filing history is also part of demonstrating the kind of active-business use that exemption generally requires — a fact-specific question for the seller's own accountant, but one that can affect how motivated the seller is to preserve a particular structure.

What to Do When a Seller Resists

Occasionally a seller is reluctant to share several years of actual tax returns, offering only a summary or a single recent year instead. This is worth taking seriously rather than working around. Reasonable next steps include:

1. Requesting the returns under an appropriately scoped non-disclosure agreement, so confidentiality concerns are addressed directly rather than used as a reason to withhold them.
2. Asking your accountant to specify exactly which documents and years are needed, so the request is clearly reasonable and not open-ended.
3. Treating continued refusal as a genuine red flag in the negotiation — a business confident in its numbers rarely has a strong reason to withhold multiple years of tax filings from a serious buyer.

Frequently asked questions