What if the business owes back taxes the seller never mentioned?

Finding an unmentioned tax debt after the agreement is signed, or after closing, is a different problem from checking for one in advance. What you can do depends on what you bought, what the agreement says and which tax is owed. This page covers where the debt sits, not how to search for it.

Who owes it depends on the structure

In a share purchase the corporation is the same taxpayer before and after, and the CRA’s guidance for a change of owners is to update the corporation’s records rather than open new ones. What the company owed is therefore still owed. In an asset purchase the seller’s accounts stay the seller’s to settle: the CRA says that before closing a payroll account the owner must remit all payroll source deductions and file final payroll information returns.

Where a statute can reach the buyer

• In British Columbia, a purchaser without a PST clearance certificate is liable for an amount equal to what the seller still owes.
• Under section 160 of the Income Tax Act, when a person transfers property to their spouse or common-law partner, to a person under 18 or to someone they do not deal with at arm’s length, transferor and transferee are jointly and severally liable for the lesser of the excess of the property’s fair market value over what was given for it and the total the transferor owes under the Act for the year of the transfer and earlier years.
• The CRA notes there may be legal implications for incoming directors and points to its guidance on directors’ liability.

What the agreement can do

Because statutes reach some buyers and not others, the purchase agreement is where the risk is allocated: who promises the business is in good tax standing, whether any money is held back and how a later reassessment is handled. Those are drafting points for your lawyer. For the checks that come before closing, see how to check a business for unpaid taxes.