Is due diligence legally required when buying a business in Canada?

The Business Development Bank of Canada says due diligence gives crucial information on a target’s finances, prospects and legal issues. That describes a review the buyer carries out, and the sources cited on this page do not describe it as a step a general statute requires. Whether a requirement applies to your deal turns on your agreement, your lender and the specific laws that touch what you are buying.

Where a requirement could come from

Check two places before you assume anything. The first is the letter of intent and purchase agreement, which may give you a period to review and make closing conditional on the result. The second is any lender’s conditions, since a lender may set its own requirements for documents and searches. Ask both what is expected, and by when.

A tax rule that rewards inquiry

Section 116 of the Income Tax Act deals with a non-resident person’s disposition of taxable Canadian property, subject to exclusions such as excluded property. The Canada Revenue Agency says that if the vendor does not comply with the requirements of subsection 116(3) and no certificate of compliance has been issued, the purchaser may become liable under subsection 116(5) to pay a specified amount of tax on behalf of the vendor. The Act also sets out exceptions, including where after reasonable inquiry the purchaser had no reason to believe that the non-resident person was not resident in Canada, and a separate rule in subsection 116(5.3) for certain property.

Who carries out the review

BDC says a lawyer can assist with the letter of intent, draft the purchase agreement and conduct legal due diligence. Which advisers you use is your choice, and the scope should be agreed with them in writing. For a document list, see what to ask for when buying a business.