Today is the filing deadline for personal tax returns in Canada. Most people file on time but many people file late. Many businesses file their tax return late also. Is this a problem? Definitely, especially for businesses. In Canada, the deadline for paying corporate tax is 2 months after your year end if you are not a CCPC, Canadian controlled private corporation. If you are a CCPC, you have three months to pay all your taxes but you have 6 months to file your tax return. What does filing a tax return have to do with selling a business?
Plenty. Once you file your tax return and it is assessed by Canada Revenue Agency, (“CRA”), the clock starts ticking. Three years after your tax return has been assessed, the return becomes statuted barred. In english, this means that unless CRA finds fraud or willful intent that you did not report your income properly, CRA cannot open up and reassess that years tax return, three years plus a day after the notice of assessment. If you are reassessed within the three year period, the three year close is not reset, the three years starts on the day of the original notice of assessment.
When you sell a business, there is often indemnifications stating that you are responsible for prior years taxes. As long as you file on time, the length of time that your reps and warranty and potential prior year tax liability will last. If you wait to sell the business and just file your tax returns, the 3 year period starts when CRA issues the notice of assessment. It is not three years from when the tax return was supposed to be filed. For example if you file your 2005 corporate income tax return now and let’s assume that it is assessed on July 1, 2010, that means that you will be potentially liable for any prior income taxes n 2005 taxation year up to July 2, 2013 – which is 8 years after the year end.
Since your potential liability can last so many years, it is important for you to be timely and file your return on time.