Tax Due Diligence Before Buying a Business in Canada: What Every Buyer Must Know

29.10.26 10:43 AM - By Abdul Moeez

Most buyers check revenue, customers and equipment. Few check the tax history, and that is where the expensive surprises hide. Unpaid payroll remittances, unfiled GST/HST returns and aggressive deductions can all become your problem the day you sign. This guide covers what tax due diligence involves, how the deal structure changes your risk, and what to review before you buy a business in Forest City or anywhere in Ontario.

What Is Tax Due Diligence?

Tax due diligence is a structured review of a business’s tax position before you commit. You are asking three questions:

  • Has the business filed and paid everything it owed to the CRA?
  • Are its numbers real, and will they hold up if the CRA looks closely?
  • Which tax liabilities, if any, will pass to you?

Think of it as a home inspection for the books. A good accountant or CPA will find the cracks before you own them.

Professional in a brown blazer writing in a notebook while using a white calculator on a wooden desk with a laptop and coffee mug, representing the careful financial review involved in tax due diligence before buying a business in London, Ontario.
Tax due diligence means reviewing past returns, financial records, and CRA filings carefully so you know exactly what you are buying before you sign.

Asset Purchase vs. Share Purchase: The Biggest Decision

How you structure the deal decides how much history you inherit.

Share Purchase

You buy the corporation itself, so you inherit everything: past tax errors, audits and unpaid balances. As a new director, you could also face personal exposure. If a business fails to remit payroll deductions or GST/HST, the CRA can collect from the directors of the corporation. The upside is that sellers often prefer share sales. The lifetime capital gains exemption (about $1.25 million as of June 2024, indexed for inflation) may shelter their gain, which gives you room to negotiate on price. 

Asset Purchase

You buy selected assets (equipment, inventory, goodwill, contracts), and the corporation’s past stays with the seller. This is usually safer for the buyer, and you can often claim depreciation on the purchase price. The trade-offs are more paperwork, possible consent requirements from landlords and suppliers, and GST/HST and Ontario compliance steps (covered below).

Tip: Ask your accountant to model both structures before you make an offer. The tax difference can be tens of thousands of dollars for each side.

Close-up of two business professionals shaking hands outdoors in front of a modern glass office building, representing the deal decision between an asset purchase and a share purchase when buying a business in London, Ontario.
The way you structure a business purchase decides how much tax history you inherit, so compare asset and share purchases before you agree to terms.

7 Things to Review Before You Buy

Request these documents in writing and have a small business accountant go through them.

  1. Corporate tax returns (T2), usually 3–5 years. Look for consistent income, unusual deductions and large shareholder loans.
  2. Notices of assessment and reassessment. These show whether the CRA has challenged anything and what was resolved.
  3. GST/HST filings. Check that every return was filed on time and that input tax credits are supported by invoices.
  4. Payroll remittances. Compare T4s and CPP/EI/income tax remittances against payroll records. Payroll arrears are among the most common hidden debts, and they are serious because unpaid payroll or GST/HST amounts become a deemed trust secured over the business’s assets. canada
  5. Worker classification. If “contractors” really work like employees, the CRA can reassess years of CPP, EI and tax.
  6. Financial statements vs. tax returns. Large gaps between the two deserve an explanation.
  7. Open audits, objections or payment arrangements. Ask directly, and get the answer in the contract.

Black pen resting on a clipboard of financial reports with charts and tables beside a laptop and pen holder on a dark desk, representing the key tax documents buyers should review before purchasing a business in London, Ontario.
Reviewing tax returns, GST/HST filings, and payroll records across several years can reveal hidden problems before they become yours.

A Realistic Scenario

Imagine you are buying a London, Ontario landscaping company. The owner shows strong profits, and the books look tidy. Your review finds that:

  • Two years of GST/HST returns were filed late.
  • Several “subcontractors” worked full-time hours with company equipment.
  • Payroll deductions were remitted irregularly.

In a share purchase, you would inherit all of it. In an asset purchase, you avoid most of the history, but you would still want to know why the business has these habits. You may also renegotiate the price, or walk away. Due diligence gives you that choice.

The GST/HST Section 167 Election

When you buy a business’s assets, GST/HST can apply to the sale. Under section 167 of the Excise Tax Act, the buyer and seller can file a joint election so no GST/HST is payable on the transaction. The election is made on Form GST44, and the details are set out in the CRA’s GST/HST Memorandum 14-4. If the seller is a GST/HST registrant, the buyer must be one too. 

Warning: Missed or late elections are a recurring source of disputes. Put the election in the purchase agreement and prepare the form before closing day. Some items, such as leases, are still taxable even with the election.

Close-up of a man leaning over a contract and circling a line of text with a red pen, representing the careful review of the GST/HST section 167 election when buying a business in London, Ontario.
Filing the section 167 election correctly and on time can keep GST/HST from applying to the sale, so check every detail before closing.

Protect Yourself in the Purchase Agreement

Findings are only useful if the contract backs them up. Ask your lawyer to include:

  • Tax representations and warranties. The seller confirms returns were filed and taxes paid.
  • Indemnities. The seller covers pre-closing tax liabilities that surface later.
  • A holdback or escrow. Part of the price stays in reserve while any CRA review plays out.
  • Price adjustments. Known problems should reduce what you pay.

Also ask your lawyer about Ontario-specific requirements, such as bulk sales rules and provincial payroll-related obligations. These vary by deal and are easy to miss.

Café owner in a white shirt leaning over a laptop at the counter with receipts and a phone beside him, representing the careful review of contract protections when buying a small business in London, Ontario.
Tax warranties, indemnities, and holdbacks in your purchase agreement protect you if hidden liabilities surface after closing.

Common Mistakes Buyers Make

  • Trusting the seller’s summary instead of reviewing source documents.
  • Reviewing only one year. Patterns show up over several years.
  • Skipping professional help to save a few thousand dollars on a deal worth hundreds of thousands.
  • Ignoring post-closing exposure. The CRA can reassess prior years later, so contract protections matter.
  • Starting too late. Due diligence should happen before the offer is final.

Final Thoughts

Buying a business should make your financial future stronger, not inherit someone else’s tax problems. Review the returns, test the numbers, choose the right structure and protect yourself in writing. Doing this early is far cheaper than fixing it after closing.

Ready to Buy a Business? Get a Second Set of Eyes

If you are considering a purchase in London, Forest City or elsewhere in Ontario, our team can review the financials, flag CRA risks and help you plan a tax-efficient structure. Reach out to book a conversation before you sign anything.

Sources

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Abdul Moeez

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