Can a holdback cover the risk of a CRA reassessment of the seller?

An escrow holdback secures whatever the purchase agreement says it secures. So a buyer can write one to cover a CRA reassessment of the seller’s own tax, and a seller can accept or resist that term. The first question is whether the buyer has any statutory exposure to the seller’s tax at all.

Where the Income Tax Act reaches a buyer

Section 160 makes a transferee jointly and severally liable with the transferor where property is transferred to a spouse or common-law partner, a person under 18, or a person with whom the transferor was not dealing at arm’s length. Liability is the lesser of two amounts, one of which is the shortfall between the property’s fair market value and the consideration given. Subsection 160(2) lets the Minister assess at any time. Section 116 can also make a purchaser liable when certain taxable Canadian property is bought from a non-resident, with exceptions in that section, including a certificate issued under s.116(4). Read both sections before relying on either.

What the holdback has to say

Ask whether it names tax claims separately from other indemnity claims, who deals with the CRA if a notice arrives, and whether the seller must pass the notice on promptly.

The release date and the reassessment window

The Income Tax Act defines a normal reassessment period in s.152(3.1), and s.152(4) lets the Minister reassess later in situations it lists. The length of the normal period depends on the type of taxpayer. If the fund is released before the period for the seller’s relevant years has run, the buyer is left relying on the seller’s promise alone. Ask the seller whether it will accept a release date tied to that period.

Other tax accounts

The CRA says that when a business closes and no longer needs its business number, certain forms must be filled in before its accounts can be closed, and that each business account has its own procedures. On selling a business, the CRA says a seller with employees must close its payroll account, and a seller with a GST/HST account must contact its tax services office to close it. A holdback written only around income tax can miss those accounts, so name each one the parties want covered.

• Which taxes the fund secures, listed account by account.
• The years covered, including the part of the closing year before closing.
• Who controls a dispute with the CRA and who pays for it.
• Whether the buyer can set off an indemnity claim against the fund.