Buying a Rival Practice: Holding Back Money for Tax Risk

The situation

Meera had run her own dental practice in Owen Sound for over a decade when a longtime competitor across town, owned by a dentist named Tesfay, came up for sale. Tesfay was retiring and wanted a clean exit. For Meera, buying the practice meant a second location, an existing patient base, and equipment she would not have to buy new. Her husband, Dawit, a technology executive, was not part of the practice but helped her think through the financing, since the couple would be putting up a meaningful share of their own savings alongside a loan.

The parties agreed on a purchase price of roughly $6.2 million for the practice's equipment, patient records, goodwill, and an assignment of the office lease, structured as an asset purchase rather than a purchase of Tesfay's corporation. Meera retained Treadstone Law to act on the purchase once the letter of intent was signed, with a closing date set about ten weeks out.

On paper, the deal looked straightforward. Both practices operated in the same field, Meera already understood the patient volumes and staffing a second location would bring, and Tesfay was motivated to move quickly given his retirement timeline. What made the file more involved than a typical practice sale was not the price or the assets being transferred, but what due diligence turned up once Treadstone Law's team reviewed Tesfay's financial and tax records in detail.

The tax exposure

Buying the assets of a business rather than the shares of the corporation that owns it is usually the safer route for a purchaser, because it generally leaves the seller's corporation, and its liabilities, behind. But an asset purchase does not make every risk disappear. During due diligence, our team reviewed Tesfay's corporate tax filings, HST remittance history, and payroll records for the practice, and flagged two problems.

First, the practice's most recent HST filing period was still open, meaning the return covering the months right up to closing had not yet been filed or assessed by the tax authority. Second, a prior payroll remittance had been filed late the year before, which is often a signal that a business's bookkeeping is not as tight as it should be. Neither issue was necessarily serious on its own, but together they meant Meera could not be certain what, if anything, the practice owed the Canada Revenue Agency for the period before closing.

This mattered because certain tax obligations, particularly under the Excise Tax Act (which governs HST) and the Income Tax Act, can follow a business relationship in ways that are not always intuitive to a purchaser. A buyer who later discovers the seller under-remitted tax for a pre-closing period, and who has no practical way to recover the shortfall from a seller who has since wound down and moved on, can be left absorbing a cost that was never theirs to begin with. Tesfay intended to fully retire and had already indicated he planned to travel for an extended period after closing, which made any post-closing claim against him harder to pursue in practice, whatever the paperwork said.

What we did

1. Quantified the realistic exposure rather than the worst case. We reviewed the practice's revenue and payroll figures to estimate a reasonable range for what an unremitted HST or payroll shortfall might actually total, rather than negotiating from an unfounded number. Based on typical remittance amounts for a practice of that size over a few months, we estimated exposure in the region of $150,000 to $300,000.
2. Proposed a holdback rather than walking away from the deal. A holdback is a portion of the purchase price that the buyer's lawyer holds in trust after closing, rather than releasing it to the seller, until a defined condition is met or a period passes without a claim. We proposed holding back 10 percent of the purchase price, or about $620,000, for 24 months, with release conditional on Meera's team confirming no reassessment had been raised for the pre-closing period.
3. Negotiated with the seller's lawyer over size and duration. Tesfay's lawyer pushed back hard, arguing that 10 percent held for two years tied up far more money than the actual risk justified and would leave Tesfay unable to fully wind up his own corporation and distribute its remaining funds in the meantime. This is a common tension in these negotiations: the buyer wants a holdback large enough and long enough to cover a real risk, while the seller wants their money and wants to close their affairs.
4. Landed on a structured compromise. We agreed to a holdback of 5 percent of the purchase price, or $310,000, but extended the holding period to 15 months instead of 24, reasoning that most HST and payroll issues surface within a year to fourteen months of the return being filed. We also added a term requiring Tesfay to promptly forward any correspondence from the tax authority relating to the pre-closing period, so Meera's team would not be relying on Tesfay to volunteer bad news.
5. Built in a mechanism for early partial release. Rather than an all-or-nothing holdback, the agreement allowed for the release of half the holdback at the nine-month mark if no issue had surfaced by then, with the balance released at 15 months. This gave Tesfay some of his money back sooner while still protecting Meera through the period when most reassessments would typically land.

The outcome

The deal closed on schedule, with $310,000 of the $6.2 million purchase price held back in Treadstone Law's trust account rather than paid out to Tesfay at closing. Neither side got exactly what they had opened with. Meera's team had wanted a larger holdback held longer; Tesfay's side had wanted no holdback at all, or a token amount released quickly. The 5 percent, 15-month structure with a staged release was the point where both sides stopped pushing.

At the nine-month mark, no reassessment or CRA inquiry had surfaced relating to the pre-closing period, and half the holdback, $155,000, was released to Tesfay as agreed. The remaining $155,000 followed at the 15-month mark on the same basis. In the end, Meera never needed to draw on the holdback to cover an actual tax shortfall. But that outcome does not mean the holdback was unnecessary. It meant the protection worked exactly as intended: it existed so that if a problem had surfaced, there would have been money available to cover it without a lawsuit against a retired dentist who had already left the province for months at a time. The cost of that protection was a slower payout for Tesfay and a longer period of administrative follow-up for both sides, which is the real trade-off in these arrangements.

For Meera, the practical lesson was less about the dollar figure and more about how the risk was handled. She had been prepared, going in, to simply trust that a fellow practice owner's books were in order. The due diligence review showed that trust is not a substitute for verification, and the holdback showed that a purchase agreement can convert an unverifiable risk into a manageable, time-limited one without derailing the deal itself.

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