This article are provided for information purposes only, and are not intended as legal advice.


Trying to sell your business with messy accounting records

October 29th, 2009

You have not been doing the bookkeeping for the business on a timely basis. You have not been filing your tax returns on a timely basis. What are the implications of not having good accounting records and filing your tax returns with the government on time.

 

Firstly when your tax returns are late, you delay when the starting date of when the tax returns become statue barred. Statute barred, in Canada means that Canada Revenue Agency (“CRA”) cannot audit those years unless they find gross misrepresentation or fraud.  If they are unable to find this, then they cannot audit those years after they become statute barred.  If you file 3 years of financial statements just before you sell your business, it will take another 3 years before the returns become statue barred in Canada.    In Canada, the three year period starts when your return is assessed by Canada Revenue Agency and not when you file the return.  If you filed the returns late and CRA audits the years that were under the ownership of the old owner at a later date.  If the seller was  in a loss position when he filed the returns but CRA disallows several expenses and now you are profitable and owe taxes, CRA will assess late filing penalties and also could assess you with penalties for willful deceit and gross misrepresentation.  If money was not paid for GST or payroll taxes prior to your ownership, you may have to contend with a payment plan but it is possible that CRA will seize your bank account to cover past debts that were generated prior to your ownership of the business.  I have recently seen a company which was struggling, who had a payment plan in force, received a notice that CRA was seizing the bank account until the balance is paid.  They were not warned that CRA changed the rules of engagement and were no longer adhering to the existing payment plan. In this case, the liability was for for payroll taxes owing while the business was owned by the previous shareholder. 
 
When you sell your business and the prior years can be challenged, the buyer of your business may want to think about whether he wants to buy the assets instead of the shares of the business.  In the buy sell agreement, it may say that the old owner is responsible for taxes but what about the penalties and interest and if they decide to challenge the assessment who covers this expense.  If you are assessed for example GST on deemed income, income which you did not report, you can challenge the CRA position however you must pay the tax first then challenge later.  In this case, who is responsible for paying the tax?  You may get a refund but now can you enforce the old owner to cover the balance even if they decide to challenge the assessment?  Does your buy sell agreement consider this situation?
 
If the buyer is potentially liable for taxes that may be reassessed, the buyer may want some security or deposit in case they need to defend your poor bookkeeping. The messier the accounting records the greater risk in the government finding a problem for tax purposes if you are audited.  The potential liability from an audit of prior years is often dealt with in a single line in the purchase and sale agreement.  Maybe you should look to see if the wording in your purchase and sale agreement covers you in case of an audit.
 

 

 

 

 

 

 

 


Filed under: Selling a business — Gary Landa @ 9:41 am


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