Anonymised, illustrative composite. This is not an encumbrance, a stale debt or a transfer. The money was intercepted in the hands of the people who owed it — which is why no register, and no page of the target's own accounts, showed anything at all.
At a glance
The target installed and serviced conveyor and packaging lines for food and beverage plants. The vendor was retiring, the business was sound operationally, and the deal was an asset purchase at $2,750,000, with the accounts receivable ledger bought at face value and included in the working capital calculation.
It was not the vendor's problem, because the Agency had not gone after the vendor. It had gone after the customers.
The discovery came sideways. The buyer's diligence programme included reference calls with the target's ten largest customers, ostensibly about service quality and renewal intentions. The third call ended with the plant's accounts payable manager asking, unprompted, whether the change of ownership meant she could go back to paying the company directly. She had a letter from the Canada Revenue Agency directing her to pay the Receiver General instead.
Two further customers had the same letter. Between them, the three held $486,000 of the $1,060,000 ledger the buyer was about to purchase at face value. The target's own accounts showed the invoices outstanding and current; from the company's point of view they simply had not been paid yet. Its ageing report was accurate. Its bank reconciliations were accurate. There was no registration anywhere — a requirement to pay is not a security interest and is not filed in any registry — and the vendor's disclosure of the arrears had said nothing about collection action, quite possibly because the vendor did not know. The letters go to the customers, not to the debtor.
Assessed source-deduction liability, including penalty and interest: $312,400. Purchased receivable ledger: $1,060,000. The three customers served held $214,000, $168,000 and $104,000 — $486,000 in total, enough to satisfy the whole assessment more than once over.
The requirements bite as and when money becomes payable, up to the tax debtor's liability. So the arithmetic was that $312,400 of the ledger the buyer was purchasing at face value was going to the Receiver General, and the balance of the $486,000 would only be released once the assessment was satisfied. The buyer's exposure was not the $486,000; it was the $312,400 within it, and the uncertainty about the rest.
Its recovery route after closing would have been a claim against a corporation whose only remaining asset was the sale proceeds, most of which the vendor intended to draw out. That is the practical reason the discovery had to come before closing rather than after.
Income Tax Act s.224(1) is the general garnishment power. Where the Minister knows or suspects that a person owes money to a tax debtor, “the Minister may in writing require the person to pay forthwith, where the moneys are immediately payable, and in any other case as and when the moneys become payable, the moneys otherwise payable to the tax debtor in whole or in part to the Receiver General on account of the tax debtor’s liability under this Act”.
Note the unit. This provision does not attach to the target's assets or to the target's bank account. It operates on the customer's obligation to pay, in the customer's hands, before the money ever becomes the target's. That is precisely why nothing appears on the target's records: from where the target sits, the invoice is simply unpaid.
Where the liability is for source deductions the Agency has a stronger instrument still. Section 224(1.2) applies “Notwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act, any other enactment of Canada, any enactment of a province or any law”, where the tax debtor “is liable to pay an amount assessed under subsection 227(10.1) or a similar provision” — the assessment for unremitted source deductions — and it reaches payments owed to a secured creditor as well as to the debtor. The money required to be paid “become the property of Her Majesty to the extent of that liability as assessed by the Minister and shall be paid to the Receiver General in priority to any such security interest”. A general security agreement over the receivables does not outrank it.
Two further subsections decide what the buyer is actually left holding. Section 224(2): “The receipt of the Minister for moneys paid as required under this section is a good and sufficient discharge of the original liability to the extent of the payment”. The customer that pays the Receiver General has paid its invoice. The invoice is gone. And s.224(4) explains why no customer will be talked out of it: “Every person who fails to comply with a requirement under subsection 224(1), 224(1.2) or 224(3) is liable to pay to Her Majesty an amount equal to the amount that the person was required under subsection 224(1), 224(1.2) or 224(3), as the case may be, to pay to the Receiver General”. A customer that pays the buyer instead pays twice.
Closing moved by eleven days. The vendor signed an authorisation letting the buyer's accountant obtain the corporation's statement of account directly, which confirmed the assessed figure and showed no other collection action. $312,400 was paid to the Receiver General directly out of the closing funds, ahead of any distribution to the vendor, with a further $75,000 held back for thirty days against interest accruing to the payment date and any further assessment for the closing period.
$312,400, and no clean route to recover it. The receivables would have been purchased at face value and then discharged in the buyer's hands by operation of s.224(2) — not disputed, not written off as bad, but validly paid to someone else. A working capital true-up would not have caught it either, because the invoices were genuinely outstanding at closing; they were extinguished afterwards.
Customer correspondence, and nothing else. There is no registry to search and no line on the financial statements. Put one question into the customer reference-call script on every deal where the target has any remittance arrears: have you received any direction from a government agency about how to pay this supplier? It cost this buyer nothing and saved $312,400.
The quantitative tell is subtler: a small number of accounts ageing out of pattern while the rest of the ledger behaves. Three customers who have always paid in thirty days suddenly sitting at ninety, with no dispute and no service complaint, is a pattern with very few explanations, and this is one of them. The other route in is the corporation's own statement of account from the Agency, obtainable in days with the vendor's written authorisation.
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