What if staff have been paid off the books?

Finding out that some staff have been paid partly or fully outside the payroll system is a serious finding, and it needs to be treated as exactly that — a specific, quantifiable exposure that has to be resolved before you can responsibly proceed, not a detail to note and move past.

What this actually creates as a liability

• Unremitted source deductions — CPP, EI and income tax withholding — that were never sent to the CRA on wages paid this way
• Understated payroll costs, which means reported profit has likely been overstated relative to what the business actually costs to run with properly recorded wages
• Employee entitlements — vacation pay, overtime, and amounts owed on termination — calculated on real earnings regardless of how those earnings were paid, which can create claims the payroll records do not show
• Workers’ compensation premiums understated relative to actual payroll, which can affect standing with the provincial board

Why this becomes the buyer’s problem

A successor business can be held responsible for a predecessor’s unremitted source deductions in certain circumstances, and an employee’s statutory entitlements do not disappear because part of their pay was undocumented — those entitlements follow the person, and in some circumstances the obligation follows the business. This exposure does not simply stay with the seller once you take over.

What this means for the deal

This has to be identified and quantified before you can responsibly close — through payroll records, interviews with staff where appropriate, and your accountant’s review — and it has to be reflected in price, an indemnity, or a decision not to proceed at all. Payroll needs to be fully compliant on a go-forward basis from your first day of ownership, with no exceptions.