Anonymised, illustrative composite. The offence attached to this carries a maximum fine of five thousand dollars. The fine is not the cost. The cost is that every other diligence question becomes unanswerable.
At a glance
A trade buyer was in exclusivity on a CBCA-incorporated industrial parts distributor operating from two British Columbia warehouses. The vendor had marketed the business on a five-year average adjusted EBITDA of $2,310,000 at a multiple of 5.5, implying $12,700,000.
The corporation had a real finance function, monthly management accounts and a review engagement each year. Nothing in the presentation suggested a records problem.
In 2021 an incoming office manager introduced a document retention policy of three years and applied it to everything already on the shelves. General ledgers, accountants’ working papers, and the schedules attached to historical board resolutions all went. Minutes survived, because they lived in the minute book rather than in the accounting files.
This is the opposite failure from records that were never made. Everything had existed, and had been properly made; it was destroyed on a schedule half the length the statute requires, by someone applying a policy she had found in a template.
The effect compounds, because the destroyed records are the ones every other question depends on. Cost base and paid-up capital could not be traced through a 2017 estate freeze and a 2019 rollover. A 2018 bonus accrual and a 2019 related-party loan appeared in minutes that approved schedules nobody could produce. And the buyer’s own future indemnity claim would have to be proved with pre-closing records that no longer exist.
Retention policy: three years. Statutory minimum under the corporate statute: six. Under the tax statute: six from a different starting point.
Four historical adjustments could not be supported, with a cumulative effect on retained earnings of $1,420,000. The quality-of-earnings scope was cut from five years to three because there was nothing to test in years four and five.
Three verifiable years averaged $2,050,000 of adjusted EBITDA against the marketed five-year average of $2,310,000. At the same 5.5 multiple that is $11,275,000 against $12,700,000 — a $1,425,000 difference, which the buyer would not bridge because it had no basis on which to believe the older years at all. Reconstructing the cost-base and paid-up-capital chain from returns and elections as filed cost $31,000.
CBCA s.20(2) requires that, in addition to the corporate records in s.20(1), “a corporation shall prepare and maintain adequate accounting records and records containing minutes of meetings and resolutions of the directors and any committee thereof”. Section 20(2.1) sets the period: “Subject to any other Act of Parliament and to any Act of the legislature of a province that provides for a longer retention period, a corporation shall retain the accounting records referred to in subsection (2) for a period of six years after the end of the financial year to which the records relate.”
Read the opening words. Six years is a floor, not a ceiling, and it yields to any longer federal or provincial period. Income Tax Act s.230(4)(b) requires records to be retained “together with every account and voucher necessary to verify the information contained therein” until six years from the end of the last taxation year to which they relate — a six that starts from a different event and can therefore end later than the corporate one. A single retention policy has to satisfy the longest applicable period, not the most familiar one.
The offence is s.20(6): “A corporation that, without reasonable cause, fails to comply with this section is guilty of an offence and liable on summary conviction to a fine not exceeding five thousand dollars.” That figure is worth noticing precisely because it is small. The same Act fines a corporation up to $100,000 for failing to keep its register of individuals with significant control. Parliament did not price these the same, and a buyer that measures this defect by its penalty will conclude it does not matter.
There is also no self-service exemption. Early disposal requires the Minister’s written permission under ITA s.230(8), and Excise Tax Act s.286(6) says the same for GST/HST records: a person may dispose of records early “if written permission for their disposal is given by the Minister”. A three-year policy adopted internally is not a permission; it is a breach with a document attached to it.
The buyer paid $11,275,000 on the three-year average, and the vendor accepted it after two weeks of arguing for the five-year number without being able to produce anything supporting it.
The tax indemnity was left uncapped for the taxation years still open, because the buyer would have to defend any reassessment of those years with records that no longer exist. The vendor’s accountant reconstructed the cost-base and paid-up-capital chain from the returns and elections as filed — the one copy a shredder cannot reach, because it is held by the tax authority rather than the company. See adjusted cost base, paid-up capital and the section 85 rollover.
A closing covenant required the corporation to adopt a retention schedule set to the longest applicable statutory period, which is the fix that costs nothing and was the reason the defect existed.
$1,425,000, had the buyer paid on years it could not verify. That is the visible number and it is the smaller one.
The larger cost is that a long survival period buys nothing here. Survival gives a buyer time to bring a claim; it does not supply the pre-closing documents a claim is proved with. A buyer that accepts a records gap and negotiates a longer survival in exchange has traded something real for something it cannot use. That is why this file was priced rather than warranted — and why a $5,000 maximum fine is a bad guide to how much a records failure costs. See the survival period entry.
Ask for the document retention policy in writing, and read it against s.20(2.1) and ITA s.230(4). It is a one-page document that tells you in advance exactly what you will not be allowed to see.
The second tell is a review or audit engagement that starts three years ago on a company that is older. Engagement files carry forward; a firm that cannot produce a comparative for year four is telling you the underlying records for year four are gone. See notice-to-reader statements and what they prove and reading three years of statements in an hour.
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