Should a tax reassessment be covered by the deal's indemnity cap, or carved out as a fundamental representation?

The rule

There is no legal default here, and that absence is itself the answer worth knowing. Treadstone Law's own guidance on the split confirms it directly: “There is no fixed rule in Ontario law dictating exactly how a cap or survival period must be structured for either category… these are negotiated contract terms.” Tax representations specifically do not fall neatly into either bucket by convention: “Tax representations often sit in their own middle category, treated as neither purely general nor purely fundamental,” typically given a longer survival period, not an uncapped one, tied to how long the relevant tax authority can still reassess the business.

Practically, this means the outcome of a post-closing tax reassessment is decided at signing, by a definitions clause, not by anything the CRA does later. A purchase agreement's defined “Fundamental Representations” list commonly names organization, authority, title and capitalization. If tax is not on that list, a tax reassessment, however large, is a general representation claim, and the general indemnity cap applies to it exactly as it would to a minor contract dispute.

When this changes

The fix, if you want tax risk treated differently, has to happen at drafting, not at the reassessment. Either add tax representations to the fundamental list, removing the cap or extending survival to match the reassessment window, or negotiate a standalone tax indemnity with its own escrow sized to the actual reassessment risk — which is what a deal typically does once diligence finds a specific, quantifiable exposure like undocumented related-party fees, rather than relying on the general cap to absorb it.

Where this played out — from the Case Files

• • A tax reassessment that blew through the cap because tax was never a fundamental rep — the file this rule comes from: a $540,000 CRA reassessment against a $375,000 general cap, because tax was never on the fundamental-representations list
• • Three years that were never actually closed — the deal that got this right: a standalone $500,000 tax escrow, carved out of both the survival period and the general cap

Sources

• • No statute governs which representations in a Canadian business purchase agreement must be treated as fundamental, or what indemnity cap or survival period applies to each category. It is a negotiated contract term in every deal, checked and confirmed absent rather than assumed.
• • Treadstone Law — fundamental vs. general representations in an Ontario business sale — source of both quoted passages, on the absence of a fixed rule and the typical treatment of tax representations.