Why do buyers want three years of tax returns?

To a buyer, your tax returns answer a question your financial statements cannot: what you told the government the business earned. Statements can be prepared to present a business well for a sale, while a return was filed with the CRA for its own purposes. Buyers ask for several years because one year can be unusual and a pattern is harder to arrange. No law sets the number; it is what the buyer or its lender asks for.

What the returns let a buyer check

A buyer compares the revenue and profit on each return with the financial statements, the bank deposits and the figures in your listing. The CRA requires resident corporations, with a few exceptions such as registered charities, to file a T2 return each tax year, even when no tax is payable, so a corporation should have an unbroken run of returns and a missing year stands out. The returns also show the depreciation you claimed. The CRA says a seller may have recapture or a terminal loss of capital cost allowance when assets are sold, so that history helps a buyer see what a sale will trigger.

Why lenders ask for the same documents

A buyer’s lender needs the paper too. BDC’s checklist for its business purchase loan tells the buyer to have the business’s financial statements or income tax returns, along with the borrower’s recent notices of assessment. If your returns are late, missing or inconsistent with your statements, the buyer’s financing can stall even when the buyer is satisfied.

How to be ready before they ask

• Confirm that every return has been filed, and keep the notices of assessment with them.
• Reconcile each year’s return to the financial statements and write a short note explaining any difference.
• Ask your accountant about any gap or late filing before a buyer finds it.