Legal diligence is not a formality before closing — it is where a buyer discovers exactly what they are inheriting. In a share purchase, that is almost everything the corporation has ever done.
Key takeaways
STEP 01 OF 10
Treadstonelaw’s split of the work puts corporate records and the minute book first on the legal side, and for good reason — everything else in the diligence process depends on confirming who actually owns the shares and who has authority to sell them. Pull the minute book, articles and by-laws, director and officer registers, the securities register, share transfer records and share certificates before moving to anything else.
If the target owns land in Ontario, confirm the minute book also carries a register of ownership interests in land with supporting documents — a requirement that sits alongside the transparency register discussed in Step 2, and one that is easy to overlook if the diligence checklist is copied from a target with no real property.
STEP 02 OF 10
Since January 1, 2023, a private OBCA corporation must maintain a register capturing individuals holding or controlling 25% or more of the shares by votes or by fair market value, including beneficial owners and people with direction over shares — not filed publicly, but producible to tax and law enforcement authorities on request. Treadstonelaw’s guidance calls this “by a distance the most commonly missing item in minute books that were opened before 2023 and never revisited,” with penalties that “can attach to directors and shareholders personally.” Confirm this specifically for an Ontario target rather than assuming a clean minute book covers it.
STEP 03 OF 10
If a USA exists, it binds a purchaser of the shares automatically under CBCA s. 146(3), and a purchaser given no notice of it has 30 days under s. 146(4) to rescind the transaction — a buyer's counsel needs to read the USA in full, not just confirm one exists, because it may restrict the directors' powers in ways that affect how the target can be run post-closing. See drafting a shareholder agreement for a buyout group for what a well-drafted USA should cover.
STEP 04 OF 10
Treadstonelaw’s list of hidden liabilities in an Ontario share purchase names seven categories a buyer inherits regardless of disclosure: outstanding or unassessed tax liabilities including unremitted source deductions or HST, pending or threatened litigation, unpaid wages and vacation pay and workplace-safety claims history, environmental contamination tied to owned or operated property, product and service liability for goods or services already sold, undisclosed liens or security registrations, and breach-of-contract or warranty exposure. The core principle: buying the shares means buying the corporation, with every historical obligation intact, whether or not either party knew about it.
STEP 05 OF 10
ITA s. 230(4)(b) requires books and records, with every supporting voucher, to be kept until six years from the end of the last taxation year to which they relate, extended under s. 230(5) to run from the filing date where no return was filed. A target that cannot produce six years of records is not just an inconvenience for the diligence team — it is itself evidence of a compliance gap the buyer is about to inherit.
STEP 06 OF 10
ITA s. 125(2) sets a corporation's business limit at $500,000 unless associated with other CCPCs, in which case the limit is shared. If the buyer already controls other CCPCs, confirm whether acquiring the target creates an associated-corporation group that shrinks the combined small business deduction room — a real, checkable tax consequence of the acquisition itself, separate from anything in the target's own history.
STEP 07 OF 10
A share purchase is generally treated differently from an asset purchase for HST purposes — treadstonelaw’s guidance notes share sales are generally exempt from HST, while an asset sale runs through the s. 167 joint election instead. Confirm which structure actually applies to the deal in front of you, and if it is an asset purchase, verify the buyer's GST/HST registration status before closing — the election is unavailable where the seller is a registrant and the buyer is not.
STEP 08 OF 10
ITA s. 20(1)(p) allows a bad-debt deduction only for debts established to have become bad in the year and previously included in computing income — a receivable written off that was never actually taken into income in an earlier year cannot support this deduction. A financial diligence team reviewing AR aging should confirm with the legal/tax team whether historical write-offs were properly supported, not just whether they were recorded.
STEP 09 OF 10
CBCA s. 122(1) sets the standard every director owes — honesty and good faith in the corporation's best interests, and the care, diligence and skill a reasonably prudent person would exercise — and s. 105(3) requires at least 25% of directors (or one, on a board of fewer than four) to be resident Canadians. If the buyer intends to install its own directors post-closing, confirm the incoming board satisfies the residency requirement before the transaction closes, not after.
STEP 10 OF 10
Treadstonelaw’s guidance is candid that there is no fixed timeline for due diligence — what actually drives how long it takes is how complete the seller's records are and how many issues surface. A diligence process compressed to fit an arbitrary closing date, rather than the volume of issues actually found in the corporate and financial folders, is how real exposure gets missed. See building and controlling a data room for the disclosure sequence that supports a properly paced review.
A useful discipline: treat every finding that requires a follow-up question as adding to the timeline, rather than trying to protect a pre-set closing date by limiting how many follow-up questions get asked. The letter of intent's own diligence-period clause is meant to be extended when this happens, not treated as an immovable deadline that outranks what the diligence actually turns up.
Suppose a buyer already controls one CCPC using the full $500,000 business limit under ITA s. 125(2). The buyer then acquires a target that becomes associated with it. Associated CCPCs share a single $500,000 business limit between them, allocated by agreement — so if the existing corporation keeps using $350,000 of the limit, the newly acquired target has only $150,000 of room left at the reduced small business deduction rate, with income above that taxed at the higher general corporate rate.
This is a real, checkable consequence of the acquisition itself — worth confirming with an accountant before closing, since it changes the target's effective tax rate on income above its allocated share regardless of anything in its own historical compliance.
The same diligence checklist produces a different risk profile depending on deal structure. In a share purchase, the buyer inherits the corporation whole — every liability treadstonelaw's guidance lists (tax, litigation, employment, environmental, security interests, contractual) attaches regardless of whether it was disclosed or even known. In an asset purchase, the buyer generally selects which assets to acquire and which liabilities to assume, leaving undisclosed liabilities behind with the selling corporation — subject to specific exceptions (successor employer rules being the clearest one, per diligence on people, payroll and employment liability).
This is why the same diligence finding can matter very differently depending on structure: an undisclosed lawsuit is a direct inherited liability in a share deal, but in an asset deal it may simply stay with the seller and never touch the buyer at all — confirm which structure is actually on the table before deciding how much weight a given finding deserves.
Per treadstonelaw's split, the lawyer typically leads corporate records, contracts, leases, employment, IP, licences, litigation, environmental matters and insurance; the accountant leads historical financials, cash flow, working capital, receivables and payables, and asset valuation — with tax filings and compliance as a genuine overlap area both should review.
The underlying corporate-records review is largely the same, but the process is usually faster and less adversarial — see buying out a partner in an existing company for what changes when the buyer already knows the business.
There is no fixed Canadian benchmark — treadstonelaw's guidance is explicit that the real driver is the completeness of the seller's records and the number of issues that surface, not a standard number of weeks.
No — a minute book confirms governance and share ownership records are in order; it says nothing about tax debts, litigation, employment exposure or environmental issues, which are tested through separate diligence streams entirely.
The letter of intent's diligence-period clause exists exactly for this — it typically gives the buyer a defined window to investigate and, in most templates, a right to walk away or renegotiate before signing the definitive purchase agreement, since most LOI terms other than exclusivity and confidentiality are non-binding.
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