Due Diligence Turns Up CRA Arrears in a Burlington Sale

The situation

Gabriela and Jing had built a small commercial cleaning business in Burlington from nothing, growing it on evenings and weekends while keeping their day jobs. Gabriela worked in a warehouse; Jing did the bookkeeping, for this business and a few others on the side. Eight years in, the business had a steady roster of office and retail contracts, and the two of them decided it was time to sell rather than keep running two jobs each. Neither had sold a business before, and neither had a lawyer involved until a buyer's offer was on the table.

Xia, who had spent years managing operations for someone else's company and wanted to run something of her own, offered roughly $175,000 for the business's equipment, client contracts and goodwill — an asset sale rather than a purchase of Gabriela and Jing's corporation. Gabriela and Jing retained Treadstone Law once that price was agreed, to review and negotiate the sale on their behalf. The asset-sale structure mattered to both sides: in an asset sale, the buyer chooses which assets and contracts to take on and generally leaves the seller's corporation, and its liabilities, behind. But that protection only holds if the paperwork is done properly, and one piece of that paperwork is a clearance certificate confirming the seller's corporation owes nothing to the Canada Revenue Agency — something Gabriela and Jing needed to get right just as much as Xia did.

What the buyer's due diligence found

Before Xia's side would sign anything final, her advisors asked for the business's financial records — tax filings, remittance summaries, and a statement of account from the CRA covering both corporate income tax and HST, the harmonized sales tax businesses collect and remit on most goods and services in Ontario. Jing, doing the bookkeeping for the business herself, had fallen behind on filings for the two most recent quarters and had also missed several payroll source deduction remittances — the portion of employee wages an employer must withhold and send to the CRA for income tax, CPP and EI. Neither shortfall had come up in negotiations. Gabriela, who left the books to Jing, said she hadn't known the extent of it either.

The CRA statement of account showed arrears of roughly $19,000 between the unremitted HST and the payroll deductions, plus accumulating interest. That is a meaningful risk on both sides of the table, because certain CRA debts can attach to the assets purchased or, in some circumstances, to a buyer who fails to obtain the required clearance certificate before releasing the purchase funds — which meant it was very much in Gabriela and Jing's interest to get the arrears resolved cleanly, not just Xia's. The certificate process itself takes time — the CRA reviews the seller's full account before issuing one — and closing was scheduled for a few weeks out. Waiting for a certificate before closing would have meant delaying the deal for months while Gabriela and Jing caught up their remittances and the CRA processed the request.

Xia's instinct was to walk away. Gabriela and Jing needed the sale proceeds to catch up the arrears in the first place — a common and genuinely difficult bind for small business sellers who have let bookkeeping slip. Both sides had a legitimate interest in finding a way through rather than starting over with a different buyer or a different business, and Gabriela and Jing were anxious not to lose the sale entirely over a debt they fully intended to clear.

What we did

1. Quantified the exposure precisely, rather than let Xia's side set the number. We worked from the CRA's own statement of account rather than accepting a rounded estimate from the buyer's advisors, since interest continues to accrue on outstanding remittances and Gabriela and Jing needed a defensible figure to negotiate a holdback that was fair rather than padded.
2. Pushed for a holdback instead of an outright price cut. A holdback is an amount from the purchase price held back at closing — often in a lawyer's trust account or a joint escrow — rather than paid out to the seller immediately. It let the deal close on schedule and let Gabriela and Jing keep the bulk of their proceeds up front, instead of accepting a flat reduction in price sized to whatever the buyer's side assumed the arrears might ultimately cost.
3. Negotiated the holdback amount and release terms. We agreed to holding back roughly $30,000 — the estimated $19,000 arrears plus a cushion for additional interest and any late-filing penalties — with the balance released to Gabriela and Jing once the CRA confirmed the account was settled, and any surplus returned to them at that point rather than kept by the buyer.
4. Built the mechanics into the purchase agreement. The agreement set out who would apply for the clearance certificate, how the holdback funds would be paid to the CRA on Gabriela and Jing's behalf, a deadline for them to file the outstanding returns, and what would happen to any amount left over once the account cleared — protecting them from the holdback becoming a slush fund the buyer could delay releasing.
5. Kept the asset-sale structure intact. Because Xia was buying specific assets and contracts rather than the corporation itself, Gabriela and Jing kept their corporation, and the CRA debt stayed there rather than becoming Xia's problem to collect from them separately. The holdback existed to fund that debt's resolution, not to shift legal responsibility for it in a way that exposed them further.

The outcome

The sale closed on the original timeline, with roughly $30,000 held back from the $175,000 purchase price. Gabriela and Jing filed the outstanding HST and payroll returns over the following weeks, and the CRA's final reconciliation came in at about $24,000 once interest was included — higher than the original statement of account but within the holdback cushion. That amount was paid directly to the CRA from the held-back funds, and the remaining roughly $6,000 was released to Gabriela and Jing several months after closing, once the account showed as clear.

Neither side got exactly what they wanted going in. Gabriela and Jing received less at closing than the agreed price, and less again once the final CRA number landed above their own estimate — a direct cost of not staying on top of remittances while running the business — and they carried the administrative work of filing outstanding returns while a buyer's advisors watched the process closely. Xia would have preferred a straightforward closing with no arrears at all, and she waited several months for confirmation the account was fully clear before any surplus came back to Gabriela and Jing. The compromise worked because it let a viable sale go through instead of collapsing over a debt that was real but quantifiable, and because the holdback gave both sides a mechanism to resolve it fairly rather than Gabriela and Jing simply accepting whatever discount the buyer's side first proposed.

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