Catching a Cross-Border Tax Trap Before Closing in Oshawa

The situation

Thao spent a decade as a factory technician before she and Linh, who drove long-haul routes across Ontario and the northeastern United States, pooled their savings to buy a small precision parts shop in Oshawa. Over twelve years they grew it into a supplier with steady contracts in the automotive and industrial sectors. Their personal lives stayed modest - the money went back into equipment and staff - but the business itself had become a meaningful asset.

By early 2026, a complementary manufacturer a few kilometres away came up for sale. Its owner, Hyun-woo, had built the company over two decades but had relocated to the United States several years earlier and had been running it remotely ever since. The two businesses shared customers and machinery types, and Thao and Linh saw a chance to combine them into a single, larger operation. They agreed in principle to buy 100% of the shares of Hyun-woo's company for a price in the low eight figures, and brought Treadstone Law in as buy-side deal counsel before signing anything binding.

The mandate was straightforward on paper: review the draft purchase agreement, run standard financial and legal due diligence on the target, and get the deal to a closing that reflected what Thao and Linh actually thought they were buying. Neither of them had been through an acquisition of this size before, and both were candid that they were relying on counsel to flag anything about the seller's situation that could change the economics of the deal after the fact rather than before it.

What the review found

Two issues surfaced during the early diligence work, and both traced back to the same fact: Hyun-woo no longer lived in Canada.

The first was tax exposure. Under the Income Tax Act, when a Canadian buyer purchases shares of a Canadian company from a seller who is not a resident of Canada, the buyer can become personally responsible for withholding a portion of the purchase price and remitting it to the tax authority - unless the seller obtains a clearance certificate confirming their taxes on the sale will be paid. If the buyer pays the full price without that certificate and the seller never settles their tax bill, the tax authority can pursue the buyer for the unremitted amount. The exposure is not small: the required withholding runs to roughly a quarter of the purchase price. On a deal in this range, that meant Thao and Linh could have been on the hook for close to $2.75 million if Hyun-woo's certificate never came through and they had already sent the full amount.

The second issue was currency. The purchase price had been negotiated and drafted in US dollars, reflecting Hyun-woo's residence and banking, while Thao and Linh's acquisition financing was arranged in Canadian dollars through their own lender. The draft purchase agreement said the price would be "converted at the prevailing rate on closing" without specifying whose rate, what time of day, or what would happen if closing slipped. A shift of even two percent in the exchange rate between signing and closing - not unusual over a few months - would have moved roughly $120,000 against them, with no mechanism in the agreement to allocate that risk to either side.

What we did

1. Confirmed Hyun-woo's residency status early. Before drafting any closing mechanics, we established that Hyun-woo was in fact a non-resident of Canada for tax purposes, which is what triggers the withholding obligation. This is a factual question the buyer's lawyer needs answered directly - it is not something to assume from an address on a letterhead.
2. Built a statutory holdback into the purchase agreement. Rather than relying on Hyun-woo to obtain a clearance certificate on his own timeline, we negotiated a closing structure where a portion of the purchase price equal to the potential withholding amount would be held in escrow by a third party until the certificate was produced. If the certificate never arrived, the funds would be remitted to the tax authority directly rather than paid to either party.
3. Made the escrow account itself compliant. The account needed to be structured so that funds could flow to the tax authority if required, without needing Hyun-woo's further consent at that point. We worked with the escrow agent to build that release condition into the escrow terms rather than leaving it as a side promise between the parties.
4. Fixed the currency mechanism in writing. We amended the agreement to state the exact source and timing for the exchange rate - the closing-day rate from the buyer's own lender, locked in at a specific point before funds were released - and had Thao and Linh's lender arrange a forward contract for the Canadian-dollar portion of the price. That fixed their cost in Canadian dollars months before closing, regardless of what the exchange rate did in the meantime.
5. Coordinated with Hyun-woo's US-based counsel on timing. Clearance certificates can take time to process, and delays on that front are common in cross-border sales. We built a closing timeline with enough runway for the application to be filed early, rather than treating it as a last-minute condition.

The outcome

Hyun-woo's clearance certificate came through about six weeks before the closing date the parties had set, comfortably inside the runway that had been built into the schedule. Because the holdback and escrow terms were already documented in the purchase agreement, the parties simply confirmed the certificate had arrived and released the full price at closing rather than routing any of it to the tax authority. Had the certificate been delayed or never issued, the structure would have protected Thao and Linh regardless - the withheld amount would have gone to the tax authority rather than becoming a personal liability months or years later.

The currency piece worked the same way. The forward contract locked in the Canadian-dollar cost of the US-dollar purchase price roughly four months before closing. The exchange rate did move in the interim, in a direction that would have cost Thao and Linh money under the original open-ended wording - but because the rate was fixed, the shift had no effect on what they actually paid. The deal closed at the price they had budgeted for from the outset, and the combined business began operating as one company the following month.

The integration itself went smoothly enough that within a few months Thao and Linh had consolidated purchasing and scheduling across both sites, and the customer contracts that had originally drawn them to the deal stayed in place through the transition. None of that depended on the tax or currency structuring - but none of it would have mattered if the underlying deal terms had exposed them to a seven-figure tax bill or an unhedged currency swing large enough to eat into working capital right when they needed it most for integration costs.

Nothing about this case involved a dispute, a lawsuit, or a client losing money. That was the point. The tax exposure and the currency risk were both structural features of buying a company from a non-resident seller with a foreign-currency price tag, and both were fixable with the right terms in the purchase agreement - as long as someone identified them before the agreement was signed.

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