A Business Sale Complicated by a CRA Reassessment

The situation

Vaishali called our office on a Tuesday afternoon, two weeks after closing on the sale of her Goderich manufacturing business, and her first sentence was that the Canada Revenue Agency had reassessed the company for a tax year she thought was long settled. The sale had closed a few months earlier at a price in the high tens of millions, and Vaishali had stayed on through a transition period while the buyer, Kajan, folded the plant into a group of businesses that included several multi-unit franchise operations he had built over the years. Her co-owner and long-time general manager, Anjali, was still working through her own exit and had fielded the reassessment notice first, before forwarding it to Vaishali with a short note that said only 'this looks bad.'

The purchase agreement had included a standard tax covenant: Vaishali, as seller, had agreed to indemnify Kajan's company for any tax liability relating to periods before closing, in exchange for a lower purchase price adjustment and a shorter survival period on most other warranties. Buried in that covenant was a clause giving the party responsible for paying a tax liability the right to control how any objection to a reassessment was conducted, provided they acted promptly and kept the other side informed. At the time the agreement was signed, that clause had felt like boilerplate. Now it was the only thing standing between Vaishali and a reassessment her own former company had little incentive to fight properly, since the tax bill would land on her, not on Kajan.

The company had also been trading unevenly in its final year under Vaishali's ownership, with a large customer contract lost mid-year and receivables stretched further than usual, and the reassessment arrived attached to a narrative that made the numbers look worse than the business ever was. Kajan's finance team had flagged the reassessment to their own advisors and suggested, in an early email, that the underlying issue might reflect how the business had been run before the sale rather than a simple CRA disagreement over classification.

Vaishali needed to know, quickly, whether she was looking at a genuine liability in the millions or a dispute she could actually win, and whether the indemnity clause gave her enough control to find out before anyone else decided the answer for her.

What the documents showed

Once we had the covenant and the reassessment in hand, the first job was establishing who actually controlled the objection, because that answer determined everything else. The clause was clear enough on its face: it gave the party bearing the liability under the indemnity, in this case Vaishali, the right to direct the objection and any subsequent appeal using her own advisors, so long as she moved within the deadline and kept Kajan's company reasonably informed of major decisions. That right came from what the clause said, not from the fact that she would be the one paying; and even with it, the objection and appeal still had to be filed in the company's name, since the company, not Vaishali personally, was the party the CRA had assessed. Kajan's team read the same clause and did not dispute it, but they made plain that they expected the process handled carefully, since their own company's name was now on the reassessed entity.

With control confirmed, we pulled the underlying working papers for the tax year in question, going back through the company's own books rather than relying on the CRA's summary of the issue. The reassessment treated a category of equipment-related expenditures as ineligible for the tax treatment the company had claimed, and on the CRA's initial numbers the exposure looked like it could run into several million dollars once penalties and interest were included. That was the figure that had frightened everyone on the first read.

The documents told a different story once they were organized properly. The equipment purchases in question were supported by invoices, delivery records and an engineering assessment commissioned at the time, all of which showed the expenditures fit within a category the company's accountants had applied consistently for years, not a one-off claim invented before a sale. The weaker trading year Kajan's team had pointed to turned out to be unrelated: it was driven by the lost customer contract, documented in board minutes and correspondence from more than a year before the reassessment period even began, not by any accounting irregularity. Laid side by side with the CRA's assessment, the company's own records supported roughly a third of the reassessed amount, tied to a genuinely debatable classification question, with the rest resting on an assumption the CRA had made without the equipment documentation in front of it.

That gap between the headline number and the supportable number became the entire shape of the file. It meant Vaishali was not defending a manufactured position; she was correcting an assessment built on an incomplete record, and the covenant gave her the standing to do the correcting herself rather than watching Kajan's team decide her exposure for her.

What we did

1. Confirmed control of the objection. We reviewed the tax covenant against the reassessment notice and confirmed in writing to Kajan's counsel that the covenant gave the party bearing the liability under the indemnity, Vaishali, the contractual right to direct the objection using her own advisors, provided she met the filing deadline and reported back on major steps, while the objection itself would still be filed in the company's name as the assessed party; this stopped Kajan's team from filing a competing position on the company's behalf.
2. Assembled the underlying documentation. We worked with Vaishali's accountants to pull invoices, delivery records, the engineering assessment and correspondence from the relevant year, rather than relying on summaries the CRA auditor had prepared. The reassessment had clearly been built on an incomplete file, and only primary records, not argument about what the numbers probably meant, could actually show which parts of the CRA's figure held up and which did not.
3. Separated the trading downturn from the tax issue. We built a timeline showing the lost customer contract predated the reassessed tax year and was documented independently in board minutes from more than a year earlier. This mattered because Kajan's team had suggested the weak numbers reflected how the business had been run, and that suggestion needed to be addressed directly with dated evidence before it hardened into an assumption nobody had actually tested.
4. Filed a notice of objection within the deadline. We prepared and filed the objection ourselves, on Vaishali's instructions, addressing the equipment classification issue with the supporting documentation attached. Keeping the filing narrowly focused on the genuinely debatable portion of the reassessment, rather than contesting every line item on principle, preserved credibility with the CRA reviewer and kept the process moving toward a real resolution instead of a drawn-out fight.
5. Kept Kajan's company informed as the covenant required. We sent periodic updates to Kajan's counsel summarizing the objection's progress without inviting them to co-manage it or second-guess the strategy. This satisfied the covenant's notice requirement to the letter and avoided giving the other side any basis to later claim Vaishali had breached her own control obligations under the indemnity clause.
6. Negotiated with the CRA auditor's team on the classification question. Once the documentation was in front of them, we narrowed the dispute to the genuinely debatable third of the reassessment, arguing the equipment fit the claimed category based on the engineering assessment, while conceding early that a smaller adjustment on that piece was defensible. Conceding the weak point early built credibility that made the auditor more receptive on the parts of the file that were actually strong.
7. Settled the objection on Vaishali's behalf. We reached a resolution with the CRA that reduced the reassessment substantially from its opening figure, then confirmed the final indemnity payment owed to Kajan's company matched the settled amount, not the original notice. Tying the indemnity number to the settlement rather than the initial reassessment was what actually delivered the financial benefit of the work done on the file.
8. Reconciled the settlement against the indemnity's payment mechanics. We checked the sale agreement's own procedure for calculating and paying an indemnity claim, confirmed the settled tax amount, not the CRA's original reassessment figure, was the number the covenant actually required Vaishali to pay, and set out that calculation in writing so Kajan's company could not later argue for the larger, unsettled figure, avoiding a second dispute over the mechanics of payment on top of the tax question itself.

The outcome

Vaishali ended up paying an indemnity amount to Kajan's company that was a fraction of the figure on the original reassessment notice, in the low hundreds of thousands rather than the several million the CRA's initial numbers implied. That was still real money, and still a payment she had not budgeted for when she sold the business, which is why we describe this file as a contained loss rather than a win. The genuinely debatable portion of the classification issue did not go entirely her way; the CRA held to part of its position, and Vaishali accepted a partial adjustment on that piece rather than pursuing a formal appeal that would have cost more in fees and time than the disputed amount justified.

What the file avoided was worse. Because the covenant gave Vaishali control of the objection, Kajan's company never took over the process, never negotiated a settlement using Vaishali's money without her input, and never had the chance to treat the reassessment as leverage in some unrelated post-closing dispute. Anjali, still working through her own exit from other roles at the company, was able to confirm to Kajan's team early on that the equipment purchases had gone through the normal approval process, which helped keep the conversation focused on the tax question rather than drifting into questions about how the business had been managed generally.

The lesson Vaishali took from the file was less about the tax result and more about the mechanics of the covenant itself. She had read the control-of-objection clause as boilerplate when she signed the agreement, and it turned out to be the single provision that let her fix an overstated assessment on her own terms instead of having it fixed, or mishandled, by someone with less reason to get it right. She closed the file with a smaller bill than she feared and a clear record of why the larger number was never the real number.

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