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. Neither partner had sold a business before, and both wanted the process handled by someone who could tell them not just what the agreement said, but what it actually exposed them to once Jae-won owned the shares.

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 exact numbers before raising anything with the buyer's side. Before approaching Jae-won's lawyer, we had Imran and Ji-ho request full CRA statements of account for the corporate tax and payroll remittance accounts, rather than relying on an internal estimate. Walking in with a number that later turned out wrong would have cost the sellers credibility at the moment they most needed the buyer's side to trust their disclosure. The statements came back at just under $38,000, including accrued interest and penalties, giving both sides one confirmed figure to negotiate around.
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. Built the holdback around tax representations, an indemnity, and independent CRA confirmation, rather than a clearance certificate. A CRA clearance certificate is a specific instrument requested by whoever is responsible for distributing a corporation's or an estate's property — on a wind-up, for example — confirming that the amounts owing to that date have been paid or secured; it is not a general no-tax-owing letter a buyer can order on an ordinary share purchase. We built tax representations and an indemnity for the arrears into the share purchase agreement, and tied release of the holdback to an updated CRA statement of account showing the corporate accounts brought to nil, so nobody had to rely on our clients' word, the buyer's assumptions, or even our own calculations — the CRA's own updated statement would settle the question.
5. Directed the arrears to be paid from the holdback funds right away, rather than waiting on paperwork to confirm the amount. Interest continues to accrue on unremitted amounts until the CRA actually receives payment, so waiting before settling the debt would have let the balance keep growing for no reason. Imran and Ji-ho authorized payment of the outstanding remittances and HST directly from the trust holdback, stopping further interest from accruing while the updated statement of account was still pending.
6. Negotiated a short, defined extension to the closing date rather than leaving it open-ended. Confirming a corporate CRA account is not instant, and Jae-won's lender needed a firm closing date locked in advance to keep the financing approval valid. 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 reopen or renegotiate the rest of the deal under time pressure while the CRA processed the payment and confirmed the balance.

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 CRA confirmed the account had been brought current several weeks later.

When the updated statement of account came back, 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 CRA processed the payment and confirmed the balance. It also changed how Imran and Ji-ho ran what was left of the corporation in the weeks before closing — the two partners began reviewing the CRA business account together each month rather than assuming the other had it covered, a habit that cost them nothing and would have caught the shortfall years earlier if they had started it sooner.

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