Why the buyer asks: in a share sale, your tax history becomes theirs
A buyer of shares inherits the corporation exactly as it stands, including every tax position it has ever taken, so tax diligence is really the buyer asking one question: what could CRA come back for after I own this company? Reassessments reach back years, and they would land on the corporation the buyer now owns, which is why the review goes deeper than checking that returns were filed. The structure of the deal sets the depth of the dig: an asset purchase leaves your corporation and most of its history behind, narrowing the review to the taxes that can follow assets and registrations, while a share purchase opens every drawer. If you have not yet settled which deal you are doing, that decision comes first, and the trade-offs are laid out in should you sell shares or assets.
Even in an asset deal, do not expect the tax questions to disappear. The buyer still confirms your HST registration and filing status, because the election that relieves HST on the sale of a going concern depends on it, and still reviews payroll compliance for the team moving over. The difference is degree, not existence.
The core request list
The first diligence request is standard enough that you can assemble it before anyone asks. It usually covers three to six years, longer where something interesting turns up:
| What the buyer's team asks for | What they are checking |
|---|---|
| Corporate tax returns with notices of assessment | Returns filed on time, assessed as filed, no open disputes or unexplained gaps |
| HST returns, workbooks and statements of account | Collected tax remitted in full, input credits supportable, no arrears |
| Payroll remittance history and T4 summaries | Source deductions withheld and paid, contractors properly classified |
| Dividend slips and the resolutions behind them | Distributions authorized, reported and consistent with the share structure |
| CRA correspondence, audit and objection files | Past audits, their outcomes, and anything still open or likely to reopen |
| The minute book and share history, including any rollover elections | Share classes, cost base and past reorganizations documented and filed |
| Related-party agreements: leases, management fees, shareholder loans | Real arrangements at defensible amounts, papered and consistently reported |
Notice what the list is really testing: not whether you paid a clever amount of tax, but whether the records agree with each other. The returns should match the financial statements, the statements should match the bank, the dividends should match the resolutions, and the balances CRA shows should be zero or explained. Buyers forgive complexity; they price inconsistency.
The related-party file gets the closest read
The sharpest questions land on transactions between the company and people connected to it, because that is where owner-managed businesses accumulate informality. Expect scrutiny of the shareholder loan account and its direction over the years, management or rent charges paid to your holding company or your building company, salaries and dividends to family members, and any personal-use assets or expenses that ran through the business. None of these are improper in themselves; all of them are places where the paper often lags the practice, and a missing lease or an undocumented management fee reads, to a buyer, like a reassessment waiting to happen.
This is also where tax diligence connects directly to your price. The same personal and discretionary items the buyer's tax team flags are the ones being added back in your normalized earnings schedule, and diligence is where that schedule gets stress-tested line by line; the standards a defensible schedule has to meet are covered in how to normalize earnings before selling a business. Related-party items that are cleanly papered support your add-backs. Items the buyer has to guess about get discounted, and the discount lands on a multiple of earnings, not just on the item itself.
What the buyer does with what they find
Findings do not usually kill deals; they change their terms, and they do it in predictable ways. Confirmed arrears and open disputes come straight off the price or into escrow. Uncertain exposures, an aggressive expense pattern, a contractor classification question, an unfiled election, become tax indemnities in the purchase agreement and holdbacks against the proceeds, meaning part of your price is parked, sometimes for years, against problems the buyer fears inheriting. The cleaner the file, the shorter the indemnity list and the more of the price that arrives on closing day.
Two other readers work through the same file. The buyer's lender underwrites the acquisition on your records, so tax problems can constrict the buyer's financing and, with it, what they can pay at all. And your own advisors need part of the file for your side of the transaction: the share history, cost base support and corporate purity evidence that back your claim to the capital gains exemption come from the same minute book and returns the buyer is reading, so assembling the dossier serves your exemption planning as much as their diligence.
Getting the file ready before anyone asks
The whole exercise changes character if the dossier exists before the buyer does. Assemble the records above into a data room early, read them the way a buyer's accountant would, and fix what you find while fixes are still private: bring filings current, clear balances, paper the related-party arrangements, and complete the minute book. Known problems are worth resolving with advice before diligence rather than hoping they pass unnoticed, because an issue you disclose and have handled is a footnote, while the same issue discovered by the buyer's team is a negotiation event that taints the rest of the file.
Give the process the time it needs. The tax dossier is one workstream inside a larger preparation effort that also covers your statements, your earnings story and your structure, and the sequencing across years is mapped in how many years before a sale you should start planning. If any CRA matter is already open, an audit, an objection, a payment arrangement, resolving or at least containing it belongs at the front of the queue, which is work we handle directly through our CRA support service.
What changes the list, and how we get you diligence-ready
How deep the request goes, and how much work readiness takes, turns on five facts:
- Share deal or asset deal. Shares open the full history; assets narrow the review to HST, payroll and what follows the assets.
- The size and sophistication of the buyer. A private equity or strategic buyer sends specialists and long request lists; an individual buyer leans on their accountant and their lender's requirements.
- How much related-party activity exists. Holdcos, family payroll, intercompany charges and shareholder loans multiply the paper that must exist and agree.
- Your audit and arrears history. Past CRA activity invites follow-up questions; open balances invite holdbacks.
- The state of your records today. A company already producing clean statements and reconciled accounts can be diligence-ready in weeks; a shoebox needs a year.
We prepare owners for exactly this reading of their affairs, as the CPA firm on the sell side of transactions across Mississauga and the GTA: assembling the tax dossier, fixing what it reveals, papering the related-party file and standing behind the numbers when the buyer's team calls, as part of sale engagements under Strategic Projects. For owners buying, selling or transitioning a business anywhere in Ontario, the starting point is the same free 15-minute discovery call, and the first deliverable is an honest read of how your file would look to the other side of the table.
