Accounting and tax due diligence

Before closing the purchase or investment, you need to know whether the company's figures reflect reality and what tax risks might carry over to the new owner.

The accounting analysis

The accounting review assesses whether the financial statements reasonably reflect the company's financial position: composition of assets and liabilities, quality of receivables, inventory, provisions and financial debt. Net debt and working capital are of particular interest, as they are usually the basis for price adjustments at closing.

The review also seeks to normalize results: identifying extraordinary income or expenses, related-party transactions, and items that distort the recurring profitability of the business. This adjusted result is generally used as the reference for value.

The tax analysis

On the tax side, the review covers filed tax returns, any debt owed to federal, provincial and municipal tax authorities, active payment plans, withholdings and collections, and compliance with gross income tax and other levies. Contingencies arising from debatable positions or ongoing audits are identified.

When the transaction includes a reorganization, its qualification under article 80 of the Income Tax Law is verified, in order to preserve tax-free treatment and the carryover of tax attributes. A significant tax finding is reflected in the price, in specific warranties, or in withholdings on part of the payment.

Common mistakes

• Taking the result without normalizing extraordinary items
• Ignoring debt owed to provincial and municipal tax authorities
• Failing to review withholdings, collections or gross income tax compliance
• Overlooking contingencies from debatable tax positions
• Disconnecting the tax analysis from the price and warranty structure

Frequently asked questions