Anonymised, illustrative composite. The deal had been a share purchase from the first letter of intent. Three weeks before signing, a payroll audit found the corporation owed the CRA money nobody had budgeted for — and the structure changed.
At a glance
A strategic buyer signed a letter of intent to acquire 100% of the shares of an Ontario logistics company for $6.2 million. The seller’s shares were, on the facts as understood at the time, qualified small business corporation shares, making the seller eligible to shelter part of the personal gain on sale through the lifetime capital gains exemption. Everyone involved expected a straightforward share deal.
Three weeks before the planned signing date, the buyer’s payroll and tax specialist, reconciling the corporation’s trial balance against its actual remittances to the CRA, found the two did not match. A bookkeeping error had correctly accrued payroll source deductions on the books for roughly fourteen months without the corresponding amounts ever actually being remitted — leaving the corporation with a contingent liability, including interest and penalties, estimated at $210,000. The balance sheet looked clean because the accrual was booked correctly; the government had simply not been paid.
In a share purchase, the buyer would have acquired the corporation with that liability sitting inside it, protected only by the general indemnity, itself subject to a basket and cap and a finite survival period. The buyer’s counsel advised a different route: restructure the deal as an asset purchase, so the corporation, and the liability inside it, stayed with the seller entirely.
Two consequences followed, and both had to be quantified before the parties could agree a revised price. First, the seller: the $625,000 of taxable capital gain the LCGE can shelter — the taxable half of a $1,250,000 gross gain, under ITA s.110.6(2.1) read with the ½ inclusion rate in s.38(a) — is available only against a disposition of qualifying shares by an individual. An asset sale by the corporation does not generate a personal gain the LCGE can shelter at all. To illustrate the order of magnitude only — the seller’s actual marginal rate is a private fact, not a published figure, and is not asserted here as one — suppose, purely as a demonstration parameter, a combined marginal rate of 27% applied to the sheltered portion of the gain: $625,000 × 27% ≈ $168,750 of personal tax the exemption would otherwise have avoided. The parties negotiated a $170,000 gross-up to the price to approximate that loss.
Second, the buyer: freed from assuming the $210,000 contingent payroll liability, and now buying assets rather than shares, the acquisition became eligible for financing under the Canada Small Business Financing Program — a program that, per its own administering authority, "cannot" finance "share purchases" at all. The restructured deal moved up to $650,000 of the buyer’s acquisition financing — the $500,000 equipment-and-leasehold sub-cap plus $150,000 for intangibles and working capital, inside the program’s overall $1.15 million per-borrower ceiling — onto CSBFP-eligible terms, capped by the program at the lender’s prime rate plus 3% on the term portion.
Excise Tax Act s.167(1) let the restructure proceed without adding GST/HST to the cost of the deal: where a buyer acquires “all or substantially all of the property that can reasonably be regarded as being necessary” to carry on the business, the parties may jointly elect so that no tax is payable on the transferred business assets, apart from a narrow list of exceptions — services still to be rendered by the seller, property transferred by lease or licence, and, where the buyer is not a registrant, real property. The buyer registered for GST/HST as part of closing specifically to keep the election available, and the parties filed it. Goodwill, separately, falls outside GST/HST entirely under ETA s.167.1, regardless of the election.
Had the parties simply proceeded with the original $6.2 million share purchase and relied on the general indemnity to cover the payroll finding, the buyer would have taken the full $210,000 exposure into the corporation it now owned, recoverable, if at all, only by proving a breach within the survival period and inside the agreed basket and cap — years after closing, against a seller who by then might be unreachable or without means. Restructuring moved the risk entirely off the buyer’s balance sheet before closing, rather than merely giving the buyer a contractual promise to chase after the fact.
The tell was that the payroll liability reconciled cleanly to the trial balance but not to the corporation’s actual remittance history with the CRA. A diligence checklist that confirms a payroll liability is properly accrued on the books, without separately confirming the corresponding amounts were actually paid to the government, will miss precisely this gap — the books can be entirely honest about what is owed while remaining silent on whether it was ever sent.
The deal closed as an asset purchase for $6,370,000 — the original $6.2 million plus the $170,000 gross-up — three weeks later than originally planned, with the seller’s corporation, and its $210,000 contingent CRA exposure, remaining entirely outside the buyer’s hands.
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