Introduction

Acquiring shares of a corporation — or merging with a business partner whose corporation has historical CRA issues — means inheriting that corporation's full tax history, including any unresolved CRA exposure. This is one of the primary reasons buyers prefer asset purchases over share purchases, and why thorough tax due diligence is essential before any corporate acquisition.

Scenario: Ridgemont Engineering Acquires 50% of a Partner's Corporation

Ridgemont Engineering Inc. acquires a 50% interest in Hartley Technical Services Inc. by purchasing shares from the existing sole shareholder. The deal is valued at $800,000 for the 50% interest, based on current earnings and assets.

After closing, the CRA initiates an audit of Hartley Technical's 2022 and 2023 returns — prior to Ridgemont's involvement. The audit identifies $120,000 in disallowed subcontractor expenses across the two years, resulting in a reassessment of approximately $31,800 in additional corporate tax plus interest.

Ridgemont did not cause this problem. But Ridgemont now co-owns a corporation that owes $31,800+ to the CRA.

What Due Diligence Should Have Revealed

Before acquiring shares of any corporation, tax due diligence should include:

Review of T2 returns for the past five years: Are all returns filed? Are the income and expense patterns consistent? Are there unusual expense categories or large single-year items that might attract CRA scrutiny?

Review of CRA My Business Account correspondence: Through a Represent a Client authorisation, the CPA can review the corporation's CRA account for outstanding notices, audit correspondence, or unresolved balances.

Review of shareholder loan account history: Large or unresolved shareholder loan balances are a red flag for section 15(2) issues.

Review of HST account and T4A filing history: Missing T4As for subcontractors and HST reconciliation gaps are specific audit triggers.

Representations and warranties in the share purchase agreement: The agreement should include specific tax representations — that all returns have been filed, all taxes have been paid, no assessments are outstanding or threatened — with indemnities for any pre-closing tax liabilities that emerge post-acquisition.

The Indemnity as a Planning Tool

Where due diligence identifies potential CRA exposure — incomplete documentation, unusual subcontractor payments, a shareholder loan history that raises questions — the share purchase agreement can require the seller to place a portion of the purchase price in escrow pending resolution of the identified issues. If the CRA subsequently assesses, the escrow funds cover the liability.

Without a specific indemnity, the new co-owner is exposed to a share of the corporation's tax liability that arose entirely from the prior owner's conduct.

The Alternative: Asset Purchase

Where the CRA risk in a corporation's history is significant — multiple years of questionable records, outstanding audit correspondence, a known CRA dispute — an asset purchase eliminates the inherited tax history. The buyer acquires specific assets (contracts, equipment, goodwill) rather than the corporate entity, and the corporation's historical CRA issues remain with the seller.

As discussed in Article 103, the asset purchase is less tax-efficient for the seller. In a situation with significant CRA risk, the seller may need to accept the asset purchase structure — or accept a material price reduction to reflect the buyer's inherited risk.

When to Speak With a CPA

Before signing any share purchase agreement. Tax due diligence on the target corporation requires a CPA review of historical returns, CRA correspondence, and specific risk categories. The indemnity and escrow structure in the agreement should be informed by what the CPA identifies in due diligence.

Rotaru CPA conducts tax due diligence on target corporations as part of share acquisition advisory services. Book a consultation to discuss due diligence on a planned acquisition.