Entrepreneurship & Small Business

Buying a small biz, worried about tax liability

  • Last Updated:
  • Dec 20th, 2017 6:19 pm
[OP]
Newbie
Jan 19, 2014
28 posts
4 upvotes
Ontario

Buying a small biz, worried about tax liability

Hi everyone, I'm looking at buying a small incorporated business. I know the current owners are putting personal expenses through the business because I work for them, stuff like their home electricity bill, home phone, home maintenance, etc. To the tune of 20,000 expenses per year I dont think are legit. Because they get notice to reader statements done the accountant just takes the numbers in their Simply and does the statesments and taxes off that. I estimate a change in net income of at least 80,000 if i take over. Some of that is owners salary and some belt tightening and some just plain honesty.

I'm pretty nervous that that will trigger a CRA audit and I'll be left holding the bag. Any thoughts?
32 replies
[OP]
Newbie
Jan 19, 2014
28 posts
4 upvotes
Ontario
Owners are really pushing for share sale. Business is professional service so not a lot of actual assets either
Deal Guru
Aug 2, 2010
13195 posts
3411 upvotes
Here 'n There
mymward wrote:
Dec 17th, 2017 6:34 pm
Hi everyone, I'm looking at buying a small incorporated business. I know the current owners are putting personal expenses through the business because I work for them, stuff like their home electricity bill, home phone, home maintenance, etc. To the tune of 20,000 expenses per year I dont think are legit. Because they get notice to reader statements done the accountant just takes the numbers in their Simply and does the statesments and taxes off that. I estimate a change in net income of at least 80,000 if i take over. Some of that is owners salary and some belt tightening and some just plain honesty.

I'm pretty nervous that that will trigger a CRA audit and I'll be left holding the bag. Any thoughts?
I would report them to the CRA. You can do it anonymously. Why should we all pay our taxes fairly and support these crooks? Don’t buy the business because it if it gets reassessed you’re going to pay the penalties taxes and interest.
Newbie
Jul 19, 2010
23 posts
8 upvotes
Owners almost always prefer share deals. Buyers almost always prefer asset deals. There are reasons for this. Find a professional advisor (accountant, lawyer) to help you with this, especially if it's your first transaction.

If you feel there is substantial risk in a share deal, it should be reflected in the price.
Deal Guru
Aug 2, 2010
13195 posts
3411 upvotes
Here 'n There
mrmcwn wrote:
Dec 18th, 2017 1:35 pm
Owners almost always prefer share deals. Buyers almost always prefer asset deals. There are reasons for this. Find a professional advisor (accountant, lawyer) to help you with this, especially if it's your first transaction.

If you feel there is substantial risk in a share deal, it should be reflected in the price.
First thing the accountant or lawyer is going to tell you if you are honest with them about the fraud that has occurred by these crooked business owners is not to touch it with a ten foot pole.
Last edited by eonibm on Dec 18th, 2017 5:36 pm, edited 1 time in total.
[OP]
Newbie
Jan 19, 2014
28 posts
4 upvotes
Ontario
That's kind of what I'm afraid of - that the accountant will tell me not to touch it. But I haven't taken him the books yet because we haven't signed a letter of intent. It's such an awkward situation though, we live in a small town so our lives are intertwined anyways. And they are seemingly good people who donate lots to charity. I just don't see how they think it's okay to pay their home electricity through the business? Or 100% vehicle expenses on a $60,000 truck that they barely use for business. Even with a notice to reader shouldn't your accountant warn you that's not okay?

I've worked for them for multiple years with the intention of buying the business. This is so disappointing.
Deal Addict
May 22, 2003
3036 posts
1293 upvotes
Vancouver
There is no incentive for you to do a share purchase, it's only advantageous for the sellers. Asset sale for sure is better for your interests. Even though they may not have a lot of assets, they can assign a larger value for the good will if they believe there is additional value to the company not reflected in tangible business assets.
Deal Guru
Aug 2, 2010
13195 posts
3411 upvotes
Here 'n There
mymward wrote:
Dec 18th, 2017 5:52 pm
That's kind of what I'm afraid of - that the accountant will tell me not to touch it. But I haven't taken him the books yet because we haven't signed a letter of intent. It's such an awkward situation though, we live in a small town so our lives are intertwined anyways. And they are seemingly good people who donate lots to charity. I just don't see how they think it's okay to pay their home electricity through the business? Or 100% vehicle expenses on a $60,000 truck that they barely use for business. Even with a notice to reader shouldn't your accountant warn you that's not okay?

I've worked for them for multiple years with the intention of buying the business. This is so disappointing.
Anyone who cheats on their taxes by claiming personal expenses as business expenses, which is fraud, is not a good person. The people who do this are just making everyone's taxes higher because they are not paying their fare share. So what if they are committing fraud so they can donate to charity. That's not virtuous in the least!

Whomever does their tax returns is complicit. Sure some accountants just take whatever numbers you give them and just do the return and might not notice anything unusual but this seems quite glaring. We are not talking about claiming your entire $60/mos cell phone bill when the majority of it is used personally or claiming a few magazine subscriptions. I don't know how the accountant can just look the other way. I also don't know how you can sleep at night if you don't report them to the CRA. It can be anonymous. They have a tip line and you can also just do it online at an internet cafe or library so your home IP address is not shown anywhere (but the CRA does honour anonymity no matter where you do it). These people have no moral, ethical or legal compass. I couldn't sleep at night doing what they do with my various businesses.

What you should not be afraid of is the accountant telling you not to touch it but him not telling you that which then might make you feel it is okay to buy this business from these crooks and then take over their tax liability.

Best strategy is report them, they'll get fined and the business will be a lot cheaper for you to buy from them!
Deal Addict
May 12, 2014
1585 posts
1044 upvotes
Montreal
If you feel that reporting them is the correct course of action, then you should do it proudly and openly. Surely if it's the proper thing to do you will loudly proclaim your role in their destruction before all your friends and family.

Only cowards report on friends and neighbors anonymously, and surely you don't want to live in a society of informants.

Of course reporting them will likely mean that the company will be destroyed, you'll lose your job and so will they, and ironically the government will probably wind up with less overall tax revenue over the next 10 years.


As for the purchase, like all owners they want to sell shares. Since there may be a tax liability in this company (you're not 100% sure of what's going on, are you?) you must insist on an asset purchase only in this case. Let them know the reason why.


These assets will include trademarks, client lists, long term contracts, leases, etc. And you'll want a non compete clause.


Don't purchase the shares unless at a huge discount. You could then do a voluntary disclosure if your lawyer thinks it's appropriate in the circumstances.
Deal Guru
Aug 2, 2010
13195 posts
3411 upvotes
Here 'n There
FrancisBacon wrote:
Dec 18th, 2017 9:04 pm
If you feel that reporting them is the correct course of action, then you should do it proudly and openly. Surely if it's the proper thing to do you will loudly proclaim your role in their destruction before all your friends and family.

Only cowards report on friends and neighbors anonymously, and surely you don't want to live in a society of informants.
Cowards? Some people who have had their crimes exposed extract retribution which is totally out of line such as violence, harassment, social shaming etc. The CRA knows this and that is precisely why the allow anonymous tipping instead of expecting people to do it 'proudly and openly'. Why else do you think they make accomodations for that? I think someone who reports fraud and crime is a total absolute hero. Most people do. Also, why risk putting yourself in that position of possible harm for some fraudsters? Sheesh! They are the ones with dirty hands, not you. If their company is destroyed then they are the authors of their own misfortune. Keep your nose clean and obey the law, don't commit fraud and crimes and everything will be okay. That's the way the majority of the public behaves.
FrancisBacon wrote:
Dec 18th, 2017 9:04 pm
Of course reporting them will likely mean that the company will be destroyed, you'll lose your job and so will they, and ironically the government will probably wind up with less overall tax revenue over the next 10 years.
So your advice then is that everyone should commit fraud so the government get more revenue. Unbelievable some people think like you and condone tax fraud. I've reported a few people for tax fraud anonymously and I am proud of it. Why should hardworking people pay their fair share of taxes while others get away with it by committing tax fraud, which then results in costing all law-abiding citizens more? Wow, what a sad ethical, moral and legal compass you have.
Deal Addict
May 12, 2014
1585 posts
1044 upvotes
Montreal
eonibm wrote:
Dec 19th, 2017 12:14 am
So your advice then is that everyone should commit fraud so the government get more revenue. Unbelievable some people think like you and condone tax fraud.
Nowhere did I say that, but reading comprehension doesn't seem to be your strong suit. But I guess making up stuff is the only way you feel you can win your argument.


If indeed snitches are heroes, then why would they fear "social shaming"? They wouldn't be shamed they'd be celebrated.

By the way, no need to tell the person you're denouncing, just tell your friends and family that you send anonymous reports. Or are you afraid of disapproval from your own circles?

A society of anonymous informants is not in keeping with Canadian traditions, nor is it a healthy one.

Finally, as many hacks have recently shown, I doubt that the database of informants will stay secret forever.
Deal Guru
Aug 2, 2010
13195 posts
3411 upvotes
Here 'n There
FrancisBacon wrote:
Dec 19th, 2017 3:52 am
Nowhere did I say that, but reading comprehension doesn't seem to be your strong suit. But I guess making up stuff is the only way you feel you can win your argument.
You strongly inferred it. Everyone can see that. Nice try in attempting to backtrack and at the same time deflect by insulting me. Watch what you write.
FrancisBacon wrote:
Dec 19th, 2017 3:52 am
If indeed snitches are heroes, then why would they fear "social shaming"? They wouldn't be shamed they'd be celebrated.
Doesn't work that way. They aren't heroes by a lot of people who think like you and you might want to entertain the fact that those people can actually be in your own family.
FrancisBacon wrote:
Dec 19th, 2017 3:52 am
By the way, no need to tell the person you're denouncing, just tell your friends and family that you send anonymous reports. Or are you afraid of disapproval from your own circles?
As families and your own circles go it's not like everyone agrees on everything. Many people dread their family get togethers on occasions like TG and Xmas!
FrancisBacon wrote:
Dec 19th, 2017 3:52 am
A society of anonymous informants is not in keeping with Canadian traditions, nor is it a healthy one.
Funny yet that is precisely what the CRA has done in going to the trouble of setting up anonymous methods to provide tips to them about tax fraud. Tips went up orders of magnitute once the ability to do that anonymously was introduced a few years back. Funny that ain't it? Canadian 'traditions' are not what you think! Most people think it is very healthy that tax fraud is not rampant and that they are easy methods to try to contain it. We all pay when other commit fraud. Yes, even you!
FrancisBacon wrote:
Dec 19th, 2017 3:52 am
Finally, as many hacks have recently shown, I doubt that the database of informants will stay secret forever.
Wow, you are quite naive and uninformed! Um, the tip phone and internet are insanely easy to be anonymous on. Please explain exactly how one gets traced if one does it at an internet cafe, library or other public online system, burner phone or via an anonymous letter to the CRA?

You sure have a lot to learn about how things actually work...
Newbie
Jan 18, 2017
90 posts
60 upvotes
Before this gets side-tracked...

There are a few simple points to remember when it comes to a business purchase:

- Sellers like share sales. (They get the capital gains exemption on the sale.)
- Buyers like asset sales. (Zero risk to the buyer, and a new CCA pool.)

The sale transaction and associated price is always a compromise between the two methods. If there is a risk (like the tax risk you are talking about) then the sale price needs to be adjusted up or down to reflect that risk. If the sellers insist on selling the shares, then decrease your offer.

The next thing you need to figure out is the reassessment exposure if you did acquire the shares. So assuming that $20k/yr is ineligible, and assuming a 13.5% tax rate, that is exposure of $2,700/yr that CRA could hit you with. With interest on the back taxes, let's call it an even $3,000. And assuming CRA assesses 3 years worth of returns, that's a possible $9,000 exposure.

So there you go, you've quantified the risk. If the sellers want $200,000 for the business (and you were originally OK with that), you offer $190,000, and put $10k away in a savings account as a contingency fund should CRA reassess. Don't grenade a good deal just because of a possible tax risk. Quantify the exposure first, then make a decision as to whether or not you want to deal with the headache.

Also, if/when you acquire the shares, the tax return will change in terms of shareholders and stuff like that. CRA will see the change in ownership, along with the expense changes. Usually if they see an owner change, they are less concerned about the expense variances, or so we are told. Something to thing about anyway.

Lastly, I don't know what neighbourhood you are from, but most people don't like rats. If you get labelled as one, it is hard to get away from that reputation, especially in a small town. I'd be cautious about listening to some of the advice in this thread.

mymward wrote:
Dec 17th, 2017 6:34 pm
Hi everyone, I'm looking at buying a small incorporated business. I know the current owners are putting personal expenses through the business because I work for them, stuff like their home electricity bill, home phone, home maintenance, etc. To the tune of 20,000 expenses per year I dont think are legit. Because they get notice to reader statements done the accountant just takes the numbers in their Simply and does the statesments and taxes off that. I estimate a change in net income of at least 80,000 if i take over. Some of that is owners salary and some belt tightening and some just plain honesty.

I'm pretty nervous that that will trigger a CRA audit and I'll be left holding the bag. Any thoughts?
______
Canadian & US tax guy

Top