How Due Diligence Caught a Hidden CRA Debt Before Closing

The situation

Imran and Ji-ho had built a landscaping and snow removal business in Innisfil over nine years, incorporated together as equal shareholders. Imran kept his day job as a hotel front-desk supervisor and handled the business side in the evenings — quoting jobs, chasing invoices, filing the corporation's paperwork. Ji-ho ran the crews, did the estimates on-site, and managed the seasonal staff who mowed lawns in summer and cleared driveways in winter. It worked, and after years of steady growth they agreed to sell to Jae-won, an operator looking to expand into the area with an existing fleet of equipment.

They agreed on a purchase price of roughly $480,000 for the shares of the corporation, reflecting the client list, the equipment, and a couple of years of consistent contracts with local property managers. Jae-won's lender required the sale to close within about ten weeks, and both sides wanted a clean, fast deal. Imran and Ji-ho retained our team to handle the sale side: drafting the share purchase agreement, coordinating disclosure, and getting them to closing.

What due diligence found

Because Jae-won was buying the shares of the corporation rather than just its assets, he would be acquiring the company exactly as it stood — including anything the corporation owed. A share sale does not wash away a company's debts; the buyer inherits the same legal entity, with the same bank accounts, the same contracts, and the same obligations to the Canada Revenue Agency. That made a clean tax picture essential, and it is standard practice on any share sale to confirm one before money changes hands.

As part of preparing disclosure, our team requested the corporation's recent notices of assessment, its HST filing history, and a summary of payroll remittances for the seasonal crews. The HST filings were current. The payroll remittances were not. Two years earlier, during a stretch when the business had taken on a large winter contract and hired several additional seasonal workers, the corporation had fallen behind on remitting source deductions — the portion of employee pay that an employer is required to withhold and send to the CRA for income tax, Canada Pension Plan, and Employment Insurance. Interest and penalties had been accruing since, on top of a smaller amount of unremitted HST from the same period. Combined, the corporation owed the CRA roughly $38,000.

Neither partner had a full picture of it. Ji-ho, focused on operations, had signed off on payroll without tracking whether remittances were actually being made. Imran had been juggling the filings around his hotel schedule and had let a couple of remittance periods slip, intending to catch up once the winter contract wound down, then lost track of it entirely. It was not concealment — it was two busy people assuming the other had it covered. But from a legal standpoint, it did not matter how the arrears arose. They existed, they were the corporation's debt, and if the sale closed with that debt still sitting on the books, it would become Jae-won's debt the moment he took over the shares.

What we did

1. Confirmed the numbers before raising them with the buyer's side. We had Imran and Ji-ho request full statements of account from the CRA for both the corporate tax and payroll remittance accounts, so the figure being negotiated was accurate rather than an estimate. It came back at just under $38,000 including accrued interest and penalties.
2. Disclosed the arrears to the buyer's lawyer rather than waiting to be asked. The share purchase agreement's representations would have required disclosure of any outstanding tax liabilities in any event, and a deal built on incomplete disclosure creates far bigger problems later than one built on an early, honest conversation. Raising it proactively also gave our clients more control over how the conversation went.
3. Proposed a price adjustment paired with a holdback rather than a price cut alone. A straight reduction to the purchase price would have left Jae-won exposed if the true amount owing turned out to be higher than estimated, since interest continues to accrue on unremitted amounts until they are paid. Instead, we proposed that $50,000 of the purchase price be held back in our firm's trust account at closing — enough to cover the arrears with a buffer for additional interest — rather than paid out to the sellers immediately.
4. Made the holdback conditional on a CRA clearance certificate. A clearance certificate is a document the CRA issues confirming that a corporation has no outstanding tax debt as of a given date. Requesting one before releasing the full holdback meant nobody had to rely on our clients' word, the buyer's assumptions, or even our own calculations — the CRA's own confirmation would settle the question.
5. Directed the arrears to be paid from the holdback funds once the clearance certificate was requested. Imran and Ji-ho authorized payment of the outstanding remittances and HST directly from the trust holdback, stopping further interest from accruing while the certificate was pending.
6. Negotiated a short extension to the closing date. Clearance certificate requests are not instant, and Jae-won's lender needed the closing date locked in advance. We agreed on an amended closing roughly three weeks later than originally planned, with the purchase price and holdback terms otherwise unchanged, so neither side had to renegotiate the whole deal under time pressure.

The outcome

The sale closed at the amended date, about three weeks behind the original schedule. Jae-won took ownership of the corporation knowing exactly what he was buying, with no tax debt attached to it. Imran and Ji-ho received the bulk of the purchase price at closing, with the $50,000 holdback remaining in trust until the clearance certificate arrived several weeks later.

When the certificate was issued, it confirmed the CRA account had been brought current. Of the $50,000 held back, roughly $38,500 had gone toward the arrears and accrued interest, and the remaining $11,500 was released back to Imran and Ji-ho. Net of the tax debt, they walked away with the deal they had agreed to — just later, and with a clearer accounting of where the money actually went, than either of them had expected going in.

The result is a straightforward one to describe, but it depended on catching the problem before closing rather than after. Had the arrears surfaced only once Jae-won owned the corporation, he would have had a claim against Imran and Ji-ho for breach of the representations in the purchase agreement — a dispute that would have taken far longer to resolve than three weeks, and would have cost all three of them a great deal more than the interest that accrued while the clearance certificate was pending.

What you can learn from this