Anonymised, illustrative composite. A known SR&ED tax risk was carved out into its own dollar-one, uncapped indemnity — drafted around the two years diligence had flagged, not around what a CRA audit would actually reach.
At a glance
A buyer acquired all of the shares of an Ontario manufacturing company — a Canadian-controlled private corporation — for $6,100,000. Due diligence turned up a specific, identified risk: the company had claimed SR&ED investment tax credits of $310,000 for its 2023 taxation year and $340,000 for 2024, and the buyer's tax advisor considered both years exposed to a CRA challenge on the underlying eligibility of the claimed work.
Rather than fold that risk into the general indemnity, the parties negotiated a special indemnity: the seller agreed to indemnify the buyer dollar-one and uncapped for “any reassessment by the Canada Revenue Agency of SR&ED tax credits claimed by the Corporation for its 2023 and 2024 taxation years”, surviving until 90 days after the relevant reassessment period closed. The general indemnity, covering the ordinary run of representations including tax representations generally, kept its standard architecture: a $50,000 basket, a $2,050,000 cap, and a 24-month survival period.
At month 15, CRA opened an SR&ED audit focused on the 2023 claim. CRA auditors reviewing a multi-year research project routinely pull the immediately adjacent taxation year into the same audit once questions arise about how a project's activities were characterized — and this audit did exactly that, extending to the 2022 taxation year, which nobody on either side had flagged as at risk during diligence because the 2022 SR&ED claim had not stood out from the company's ordinary filing pattern.
The special indemnity, drafted around the two years diligence had actually flagged, said nothing about 2022. Read literally — and a dollar-one, uncapped indemnity is exactly the kind of clause a seller's counsel will insist be read literally — it did not reach the 2022 reassessment at all.
CRA's 2022 reassessment came to $265,000 in denied credits plus interest. Because it fell outside the special indemnity's named years, the buyer had to run it through the general indemnity instead: above the $50,000 basket on its own, and well inside the $2,050,000 aggregate cap, which had not been touched by any other claim. The 2023 and 2024 reassessments, $650,000 combined, proceeded under the special indemnity, dollar-one and uncapped, entirely unaffected by the general indemnity's cap even though $650,000 would have consumed most of it.
No statute polices the scope of a bespoke indemnity carve-out. A special indemnity is a pure creature of drafting, and it protects exactly, and only, what its own words name — not the underlying category of risk the parties had in mind when they wrote it. That is the entire mechanic here: the carve-out was drafted around the two years diligence happened to flag as risky, rather than around the mechanism of the risk itself, which was always going to be however far a CRA audit of the SR&ED claims chose to reach.
What kept the buyer whole on the 2022 year was not the special indemnity at all — it was that the general indemnity's ordinary tax representation was still within its 24-month survival period when the reassessment arrived at month 15. A CCPC's SR&ED credits stay open to CRA review for three years under the Income Tax Act's normal reassessment period: s.152(3.1) defines that period, for a taxpayer that is not a mutual fund trust or a non-CCPC corporation, as “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”. A general survival period shorter than that three-year window — not 24 months but, say, 15 — would have left the 2022 reassessment falling into a true gap: too late for the general indemnity, and never named by the special one.
The buyer recovered $265,000 for the 2022 reassessment under the general indemnity, subject to that regime's basket and cap, and recovered the full $650,000 for 2023 and 2024 under the special indemnity, dollar-one and uncapped as negotiated. The seller did not dispute either result once counsel confirmed the plain reading of both clauses — the special indemnity's narrow drafting was, if anything, favourable to the seller on the 2022 year, and the seller had no basis to argue the general indemnity should not apply to a tax representation breach the general clause was always meant to cover.
Had CRA's audit landed at month 26 rather than month 15 — two months after the general indemnity's 24-month survival had lapsed — the 2022 reassessment would have had no home in either instrument: too late for the general indemnity, and outside the special indemnity's named years regardless of timing. The buyer's actual outcome depended on a coincidence of timing the drafting did nothing to guarantee.
The tell was that the special indemnity's scope mirrored the diligence findings exactly — two named years, matching the two years flagged in the data room — rather than the mechanism that would actually determine CRA's exposure, which is whatever years a live audit happens to reach once opened. A carve-out drafted to the facts diligence happened to surface is only as good as that diligence; a carve-out drafted to the mechanism of the risk survives what diligence missed.
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