The tax indemnity survived for the applicable limitation period. Nobody defined it, and the Agency reassessed a year the buyer had treated as closed.
At a glance
A printing group bought all the shares of an owner-managed specialty printer on 14 March 2023 for $4.4 million. The tax representations were unremarkable: all returns filed, all amounts remitted, no waivers outstanding. The indemnity behind them survived until the expiry of the applicable limitation period for reassessment, a phrase both sets of counsel had used before and neither had ever had to apply. A $250,000 escrow was released at eighteen months.
In late 2026 the Agency opened a review of the target's scientific research and experimental development claims for 2020 and 2021 and concluded that the work claimed was routine production support. The same review picked up a vehicle expensed to the company and used almost entirely by the founder's spouse. Reassessments issued in March 2027 for both years.
Both years' normal reassessment periods had closed — which is precisely why the buyer had let the escrow go and had stopped diarising the file. What the buyer had not noticed is that the closing of the normal reassessment period does not close the year. It closes only the Agency's ordinary right to reassess. The extraordinary right in paragraph 152(4)(a)(i) has no end date at all, and the vendors' indemnity, pegged to the ordinary one, was long gone.
The target was a Canadian-controlled private corporation, so its normal reassessment period was three years, not four. Its 2020 return was assessed by a notice sent 4 June 2021, closing that year on 4 June 2024; the 2021 return was assessed by a notice sent 22 July 2022, closing that year on 22 July 2025. The buyer's advisers took the latter as the outer edge of the indemnity and closed the file.
The reassessments added $268,000 of federal and Ontario tax across the two years, plus $61,000 of arrears interest — $329,000 against a purchase price of $4.4 million, and against an escrow of $250,000 that had been released twenty months earlier. Notice of an indemnity claim was delivered in April 2027, twenty-one months after the last of the pre-closing years had closed on the buyer's own reading of the clause.
Two provisions of the Income Tax Act do the work, and the error is in reading them as one. Subsection 152(3.1) defines the normal reassessment period, and it turns on what the taxpayer was at the end of the year. Paragraph (a) gives four years to “a mutual fund trust or a corporation other than a Canadian-controlled private corporation”; paragraph (b) gives, in any other case, “the period that ends three years after the earlier of the day of sending of a notice of an original assessment under this Part in respect of the taxpayer for the year and the day of sending of an original notification that no tax is payable by the taxpayer for the year”. An owner-managed target is a Canadian-controlled private corporation, so pre-closing years get three years. After a sale to a non-CCPC group, later years get four. The unit is the corporation's status at each year end, not the buyer's status at closing.
Subsection 152(4) then sets out when the Agency may go past that period, and the two routes are not symmetrical. Paragraph (a) applies where the taxpayer “has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act”, or has filed a waiver. Paragraph (a) states no outer date. Paragraph (b), by contrast, is expressly bounded — it applies only where the reassessment “is made before the day that is 3 years after the end of the normal reassessment period for the taxpayer in respect of the year”. The drafting contrast is the whole point: Parliament put a limit on one and not the other.
Carelessness is a low bar and a long way below fraud. A claim for work that was not eligible, supported by contemporaneous project descriptions that overstated what was done, is squarely within the language of paragraph (a)(i) — which is exactly the circumstance in which a buyer most wants its indemnity, and exactly the circumstance in which an indemnity pegged to the normal period has already lapsed.
One further trap sits in subparagraph 152(4)(a)(ii): a year is also open where the taxpayer “has filed with the Minister a waiver in prescribed form within the normal reassessment period for the taxpayer in respect of the year”. A waiver signed by the vendor before closing leaves a year open indefinitely, and a buyer never learns of it unless the representations ask. The closing date itself also matters: an acquisition of control is a loss restriction event, and s.249(4)(a) deems the taxation year that would have included that time “to end immediately before that time”, creating a stub year with its own assessment and its own three-year clock. See the deemed year end nobody budgets for.
The vendors declined the claim on limitation grounds and were right to. The buyer paid the $329,000 and rewrote the clause. The tax indemnity in its precedent now survives until ninety days after the later of (a) the expiry of the normal reassessment period for the last pre-closing taxation year and (b) the final determination of any assessment, reassessment or objection commenced before that date — with a separate, uncapped indemnity for any year reassessed under paragraph 152(4)(a). The representations now also state that no waiver under subparagraph 152(4)(a)(ii) is outstanding for any pre-closing year.
The escrow was $250,000 and the loss was $329,000, so even a retained escrow would not have covered it. What would have covered it is the drafting: an indemnity that follows the Agency's own outer limit costs the vendor nothing at closing, because on a clean file it never pays. The vendor's real objection is not the exposure, it is the reserve — and the answer to that is a declining holdback for the tax representation specifically, rather than a shorter survival period for everyone's convenience.
The tell is a cross-reference where a date should be. The applicable limitation period is not a period; it is an invitation to argue about which of several periods was meant, resolved years later by whoever has the better limitations defence. Every survival clause that points at a statute instead of a calendar has this defect. On a tax indemnity it is worse than usual, because the statute it points at has two limits and the parties will each have assumed a different one.
A 30-minute call is enough to tell you whether AI pays for itself here.
Canadian small-business transaction data is not published anywhere, so most valuations in this country quote an American benchmark. The Deavo–Treadstone Acquisition Index is a daily record of Canadian listings built to replace that: asking-price distributions by province and city are published now, and days on market, departure rates and asking-to-sale spreads follow as the series lengthens. Leave an email and we will tell you as each measure lands.
No pitch, no listings. One email when the first report lands.
