Buy the shares and you buy the corporation exactly as it is — including every tax liability it owes, known or not yet assessed. Here is what actually travels with the shares, how far back it can reach, and how to price the risk instead of guessing at it.
Key takeaways
STEP 01 OF 10
A share purchase transfers ownership of the corporate entity itself — its bank accounts, its contracts, and every liability sitting on or off its balance sheet, including tax liabilities the seller may not know about or may not have disclosed. Unlike an asset purchase, where the buyer can generally choose which specific assets and liabilities to assume, a share purchase inherits the whole legal person, tax history included.
This single fact should shape the scope of tax diligence from the outset: the question is not "does the seller say the taxes are current," it is "what would the CRA find if it looked at every filed and unfiled position going back as far as it is legally entitled to look."
STEP 02 OF 10
The Income Tax Act defines a "normal reassessment period" that runs three years from the date the original notice of assessment was sent, for a Canadian-controlled private corporation — the great majority of acquisition targets in this hub’s size range — and four years for other taxpayers (ITA s. 152(3.1)). Inside that window, the CRA can reassess a filed return without needing to show anything beyond the ordinary passage of time.
Outside it, the Minister may still reassess 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" (ITA s. 152(4)(a)(i)). Note what is not in that exception: any stated outer time limit. A target with a clean three most recent tax years can still carry real exposure further back if a misrepresentation is ever found.
STEP 03 OF 10
The Act requires books and records to be kept "until the expiration of six years from the end of the last taxation year to which the records and books of account relate," with electronic records held in an electronically readable format for the same period (ITA s. 230(4), (4.1)). Where no return was filed for a year, the six years runs from the day the return is actually filed — not from the year in question.
Request the target’s actual retained records against that six-year standard before diligence begins, and treat any gap as a specific finding to investigate, not an administrative footnote. A missing set of records for a year that is otherwise inside the reassessment window is itself a red flag worth pricing.
STEP 04 OF 10
ITA s. 160 creates a liability that is easy to miss because it does not appear as a line item anywhere in the financial statements: where a person transfers property to a non-arm’s-length recipient for consideration less than fair market value, the transferee becomes jointly and severally liable for the transferor’s unpaid tax, up to the lesser of the fair-market-value shortfall and the transferor’s total outstanding tax debt (ITA s. 160(1)). A parallel rule reaches GST/HST debt the same way (ETA s. 325(1)).
If the target corporation ever received an asset — a property, a dividend-in-kind, an intercompany transfer — from a related shareholder or holding company for less than what it was worth, and that related party owed tax at the time, the target itself can be on the hook. This is a corporate liability, not a personal one, which is exactly why it survives a share sale: the buyer inherits the corporation, and the corporation inherits the s. 160 exposure regardless of who owns its shares.
STEP 05 OF 10
Say diligence turns up a transaction from eighteen months before the sale process began: the target corporation received a commercial property from the departing shareholder’s separate holding company for $200,000 in recorded consideration, when an appraisal at the time put its fair market value at $500,000. If that holding company owed $150,000 in unpaid corporate tax at the time of the transfer, the target’s s. 160 exposure is the lesser of the $300,000 fair-market-value shortfall and the $150,000 tax debt — which is $150,000, not $300,000.
Run that arithmetic on every related-party transaction diligence uncovers, not just the ones that look large on their face. A modest-looking related-party transfer paired with a real tax debt at the transferor can still produce a meaningful, corporation-level liability.
STEP 06 OF 10
An asset purchase generally does not carry the target corporation’s own tax liabilities forward to the buyer at all — the buyer acquires specific assets from the corporation, and the corporation, still owned by the seller, remains the one the CRA can pursue for its own tax debts. This is one of the clearest, most concrete reasons an asset structure can be worth the added GST/HST and provincial-sales-tax complexity it brings, covered in choosing between a share deal and an asset deal.
Where the seller insists on a share sale — often for the reasons covered in planning the tax on a Canadian business exit — the findings in this guide should shape the indemnity and holdback negotiation described in Step 8, not just the headline price.
STEP 07 OF 10
Tax exposure of the kind covered in Steps 2 through 4 rarely surfaces in a management-prepared summary — it shows up in the general ledger detail, in related-party transaction schedules, and in the gap between what a target’s books show and what its filed returns actually say. Running financial diligence without a Big Four firm covers how to scope that review at a size and cost that fits a smaller deal.
A target with genuinely clean records makes this step quick. One with sloppy or inconsistent bookkeeping deserves more time here, not less — inconsistency is frequently where real exposure hides.
STEP 08 OF 10
Every specific tax exposure diligence uncovers belongs in the seller’s disclosure schedule by name, not folded into a generic tax representation. A representation that "all taxes have been paid when due" protects the buyer only if a breach of it is easy to prove — a specifically disclosed, quantified issue is far more useful at closing than a broad promise the seller can argue was true to the best of their knowledge.
Ontario legal guidance on structuring the buffer describes the standard mechanism plainly: an indemnity basket and cap set the threshold and ceiling for a buyer’s post-closing claims, while escrow or holdback funds physically secure the seller’s indemnity promises (treadstonelaw.ca, treadstonelaw.ca). Given the reassessment-period exposure in Step 2, a tax-specific representation should carry its own, longer survival period than the general representations — matched to the actual normal reassessment period rather than the shorter survival window that often applies to ordinary business representations.
STEP 09 OF 10
A target whose three most recent taxation years show no reassessments looks clean, and inside the ordinary three-year CCPC window that is a genuinely reassuring finding. It says nothing about whether a misrepresentation exists in an earlier year that the CRA has not yet found — and, per Step 2, there is no statutory outer limit on how far back a misrepresentation-based reassessment can reach.
Weigh this explicitly rather than treating "the last three years are clean" as equivalent to "there is no exposure." A longer look-back on related-party transactions, unusual one-time items, and any prior restructuring the corporation went through is worth the extra diligence hours on a deal of any real size.
STEP 10 OF 10
After Steps 1 through 9, some tax risk almost always remains unresolved — a related-party transaction diligence cannot fully value, a filing position that is defensible but not certain, a records gap inside the six-year retention window. That residual risk belongs in the deal terms: a larger tax-specific indemnity basket, a longer survival period for tax representations specifically, a portion of the holdback tied directly to the tax reassessment window rather than the general escrow release date, or, in the more serious cases, a price adjustment.
What it should not become is a reason to skip Steps 2 through 4 in the first place and rely on a general representation instead — a broad promise is a weak substitute for a specific, priced finding.
Two facts, read together, explain why tax exposure deserves its own diligence stream rather than a line inside a general legal review. First, a share purchase buys the corporation’s entire tax history, known and unknown. Second, the CRA’s reach into that history is not capped at three years the moment misrepresentation is found — it is open-ended. A buyer who treats tax diligence as a formality is pricing a risk with no real ceiling as though it had one.
Real Canadian case patterns bear this out in the diligence more broadly: a target’s books not matching its filed tax position, or a rebate arrangement quietly inflating reported margin, are exactly the kind of findings that surface only when someone actually reconciles the ledger against the return rather than accepting a management summary.
No. A change of ownership does not restart or extend the CRA's normal reassessment period, and it does not shorten it either. The clock runs from the original assessment date regardless of who owns the shares.
The liability generally attaches to the corporation itself, not to the buyer personally, but the buyer now owns that corporation and everything it owes. Practically, the buyer bears the economic cost even though the legal liability sits with the entity, not the individual.
It is free of the target corporation's own tax liabilities in the ordinary case, since the corporation and its history stay with the seller. It is not automatically free of provincial successor-liability or bulk-sale rules, which are a separate exposure covered in the province-specific guidance on an asset sale.
At minimum, the full normal reassessment period for the applicable taxpayer type, plus a review of related-party transactions and any prior restructuring further back, since those are exactly the fact patterns that can extend the CRA's reach beyond the ordinary window.
A 30-minute call is enough to tell you whether AI pays for itself here.
Nobody publishes Canadian transaction data, so every valuation in this country quotes an American benchmark. We are building the Canadian one — multiples, asking-to-sale spreads and days on market, by sector and by city. Leave an email and you will see it first.
No pitch, no listings. One email when the first report lands.
