What if due diligence shows the business should have been registered for GST/HST?

Finding that a seller never registered is not itself a problem. Section 240 of the Excise Tax Act says every person who makes a taxable supply in Canada in the course of a commercial activity engaged in by the person in Canada is required to be registered, except where, among other listed cases, the person is a small supplier (a small supplier who carries on a taxi business must still register for that business). The question for you is whether the seller’s sales passed the small supplier test, and the answer sits in the seller’s records, not in the registration status alone.

What the CRA says about the test and the timing

The CRA’s memorandum on liability for tax says a small supplier is not required to be registered (unless engaged in a taxi business) and may still apply voluntarily. It also says a recipient of a taxable supply (other than a sale of real property) made by a small supplier who is not registered is not required to pay the GST/HST on the supply. A person required to register under section 240(1) must, under section 240(2.1), apply before the day that is 30 days after the relevant day. In any case other than a small supplier’s taxi business, that day is the day the person first makes a taxable supply in Canada, otherwise than as a small supplier, in the course of a commercial activity engaged in by the person in Canada.

Share or asset purchase: what to ask

If you are buying shares, ask your lawyer and accountant whether any tax the company should have collected remains with it after closing. If you are buying assets, ask how the seller’s past tax position is handled in the agreement and how the sale itself is taxed. Either way, your own registration is a separate question, covered in whether you need to register after buying a business.

Fixing it: the seller’s step, and yours

The CRA’s Voluntary Disclosures Program lets taxpayers and registrants come forward to correct errors or omissions, and its information circular says it applies to disclosures relating to the GST/HST. Relief is discretionary, and the disclosure is the taxpayer’s to make. If you are buying shares, ask whether it should be completed before closing and how the agreement will allocate any amount owing.

• Ask the seller for sales by period, to test against the small supplier rules.
• Ask an accountant whether registration was required and from what date.
• Ask your lawyer how the agreement should deal with unpaid tax, such as a holdback or indemnity.