Anonymised, illustrative composite. Nobody had to prove the cash existed. The Minister is not bound by the return, the assessment is binding until varied on objection or appeal, and by the time it arrived the taxpayer was the buyer's corporation.
At a glance
Two laundromats with attached dry-cleaning drop counters, in adjacent suburbs, owned through one corporation. Coin-operated machines, a card system installed part way through 2022, and a dry-cleaning counter that took cash and debit. Statements for all three years were prepared on a notice-to-reader basis — see notice to reader statements and what they prove.
One diligence answer was accepted too easily. Asked for daily sales summaries for 2021, the vendor explained that the back-office at the older site had flooded in the spring of 2023 and the paper records were destroyed. It was true, there was an insurance claim to prove it, and the buyer moved on — understandably, because it had already decided to pay only for declared income and the missing records were, on that logic, someone else's problem.
They were not. Missing records do not stop an assessment; they change how one is built. The notice of reassessment arrived on 12 May 2026, addressed to the corporation, for the 2021 and 2022 taxation years. The Agency had reconstructed sales from total bank deposits less identified non-revenue deposits, cross-checked against water and utility consumption per reported load. It added $401,000 of income in 2021 and $283,000 in 2022.
Additional income assessed $684,000; tax, penalty and interest $291,300. Purchase price $2,300,000, so the assessment was 12.7% of what the buyer had paid for the whole business.
On the deal documents: general representations survived eighteen months, to 14 September 2026, so the claim was in time by four months. The tax indemnity was uncapped and ran until ninety days after the last day on which the Agency could reassess. A $200,000 tax holdback was still in escrow.
The corporation objected on day 71 and reconstructed sales from machine-cycle counters, the card system's transaction log for the months it was live, and supplier records for detergent and dry-cleaning solvent volumes. Assessed income came down from $684,000 to $208,000, and the liability with it, to $88,600 — funded from the holdback with $111,400 released to the vendor.
Start with the obligation. Income Tax Act s.230(1) requires every person carrying on business to “keep records and books of account (including an annual inventory kept in prescribed manner) at the person’s place of business or residence in Canada or at such other place as may be designated by the Minister, in such form and containing such information as will enable the taxes payable under this Act or the taxes or other amounts that should have been deducted, withheld or collected to be determined”. Section 230(3) adds that “Where a person has failed to keep adequate records and books of account for the purposes of this Act, the Minister may require the person to keep such records and books of account as the Minister may specify”.
Then the assessing power. Section 152(7), marginal note Assessment not dependent on return or information: “The Minister is not bound by a return or information supplied by or on behalf of a taxpayer and, in making an assessment, may, notwithstanding a return or information so supplied or if no return has been filed, assess the tax payable under this Part”. That is the provision that lets an assessment be built from bank deposits and industry ratios. Nobody has to prove the cash existed.
Then the effect. Section 152(8), marginal note Assessment deemed valid and binding: “An assessment shall, subject to being varied or vacated on an objection or appeal under this Part and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission in the assessment or in any proceeding under this Act relating thereto”. The number stands unless the taxpayer displaces it. The allocation of the onus in a tax appeal is settled by the courts rather than written into s.152, but the statutory starting point is plain enough: the assessment is binding, and the only routes out of it are objection and appeal.
A precision point, because this is where the citation usually goes wrong. Section 152(9) is the provision actually headed Alternative basis for assessment, and it is a different rule: after the normal reassessment period “the Minister may advance an alternative basis or argument” in support of an amount already assessed. It is about arguments in litigation, not about the power to assess without records. The power used here is s.152(7). Citing s.152(9) for an assessment built without books is a real and common error.
Finally, why the three-year window did not save anyone. Under s.152(3.1)(b) the normal reassessment period for this corporation was “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 an original nil notification was sent. But s.152(4)(a)(i) lifts it 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”. Inadequate records are the Agency's usual route to that finding. See how long the CRA can come back and what that means for indemnities.
And the deadline that governs the buyer's own conduct: s.165(1)(b) requires a corporation to serve a notice of objection “on or before the day that is 90 days after the day of sending of the notice of assessment”. Only the taxpayer can object. An indemnity is a promise about money; it does not file an objection, and if the ninety days pass the assessment stands under s.152(8) no matter how good the indemnity is.
The buyer's corporation objected on day 71 and did the reconstruction itself, because it was the only party with access to the machines, the card system and the supplier accounts. The vendor co-operated on the facts and refused to fund the work, which the agreement did not require it to do. The reassessment came down to $88,600 and the holdback covered it.
$291,300 if the objection had not been filed in time, on a $2,300,000 purchase — and the indemnity would not have rescued it, because a vendor that has promised to pay a valid liability is entitled to say that the liability became valid through the buyer's own failure to object. Even assuming the vendor paid, a $200,000 holdback against a $291,300 assessment leaves a shortfall to recover from a person who has already been paid and distributed.
Missing records for a defined period, in a business with a meaningful cash mix. The flood, the fire, the failed hard drive and the accountant who retired are all real events and all produce the same exposure. Treat the revenue of the affected period as the measure of the risk, and price it or hold back against it.
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