Should Companies/Partners Undertake GST/HST Inspections Before Buying a Business?
Most people hire a home inspector to inspect a home before buying a home. They hire home inspectors to find the problems that they cannot see so that they do not experience large unexpected expenditures after the closing date.
Should businesses (corporations and partners/joint venturers) hire a GST/HST expert to conduct a GST/HST focused review prior to the closing date so that they do not buy GST/HST problems that a Canada Revenue Agency auditor may blame on the buyer? What I am referring to is due diligence and a private audit of GST/HST books and records.
A GST/HST inspection is prudent if the buyer is buying the shares of a corporation. The past errors (liabilities) are acquired in a share purchase transaction. If you find a serious problem with the GST/HST compliance, then a purchase price reduction can be discussed. The purchase price reduction for the shares may be quantified by way of a pre-closing voluntary disclosure - but that may delay the transaction. If you do not want to delay the closing of the transaction, an amount of the purchase price may be put in a reserve or escrow account as the voluntary disclosure proceeds. It is not necessary to conduct a a voluntary disclosure and reserves can be maintained depending what is found in and quantified during the GST/HST inspection.
Similarly, a GST/HST inspection is prudent if the buyer is purchasing a partnership unit or joint venture interest in an existing partnership or joint venture. As discussed with corporations, the buyer would be buying the GST/HST history and the existing problems.
Even if the acquisition is an asset transaction, a GST/HST inspection is prudent. If the buyer is making offers of employment to existing employees, they will continue to make any mistakes they had been making in their record keeping and reportings. If you would like to stop bad practices, you need to know they exist and take positive steps to teach proper practices.
GST/HST inspections are not usual - yet. With the implementation of GST/HST in Ontario and British Columbia, the cost of mistakes increased to 13% and 12% respectively, plus additional basis points for interest and penalties. Depending on the value of the business that is being acquired, there is more money at stake than the cost of replacing a leaky roof or old furnace.
Cyndee Todgham Cherniak is counsel to and in affiliation with the International Trade Law and the Tax Law (Commodity Tax
