What is a proof of cash, and why do it before you buy a small business?

Figures verified on canada.ca, gov.bc.ca and BDC pages on 2026-10-28.

A listing says what the business earned, and the bank statements say what actually arrived. A proof of cash is the line by line tie between the revenue on the statements, the deposits in the bank and the sales on the GST/HST returns, and it is the fastest way to find out whether the earnings behind the price are real.

What a proof of cash is

Take the revenue the seller reports for a period, usually the last full fiscal year and the year to date. Take every deposit into every business bank account for the same period. Take the sales the business reported on its GST/HST returns for the same period. Then reconcile the three.

They will not match exactly, and they are not supposed to. Card deposits arrive net of merchant fees. A December invoice is collected in January. Loan advances, owner injections, GST/HST refunds and equipment sales land in the bank without being sales. Cash taken at the counter may never be deposited. A proof of cash lists each of those items with a document behind it and shows that, once they are removed or added, the sources land on the same number.

What is left after that is one of two things: a reconciled revenue figure a buyer can take to a lender, or an unexplained gap. The size of the gap, and the direction it runs, is the risk.

Why the GST/HST return is the third leg

Internal statements can be rebuilt by anyone with the software login. A return filed with the CRA is much harder to move after the fact. A business must register for GST/HST once its taxable sales pass $30,000 in a single calendar quarter or over four consecutive calendar quarters, so almost any business worth buying is a registrant and files returns.

The CRA assigns annual filing to businesses with $1,500,000 or less in annual taxable supplies, quarterly filing above $1,500,000 up to $6,000,000, and monthly filing above $6,000,000, and a business can choose to file more often. In British Columbia the GST is 5%, and most goods and some services also carry the 7% provincial sales tax, reported separately to the province. If the sales on the returns are well below the revenue on the income statement, either the statements are high or the returns are low. Both are a problem for a buyer, and the second can become the buyer's liability in a share purchase.

The seller has the documents. The CRA requires businesses to keep records and supporting documents for six years from the end of the last tax year they relate to, so three years of bank statements, returns and ledgers is a normal request.

Worked example

A listing reports revenue of $1,100,000 for the last fiscal year. The buyer asks for twelve months of statements for the operating account, the card processor's annual summary and the four quarterly GST/HST returns for the same year. Deposits for the year total $1,015,000.

• Merchant fees: the processor summary shows $17,000 of fees withheld before deposit. Deposits are net and revenue is gross, so add $17,000.
• Non-sales deposits: a $25,000 equipment loan advance and a $9,000 GST/HST refund are not revenue. Remove $34,000.
• Timing: receivables were $48,000 at the start of the year and $71,000 at the end, so $23,000 more was invoiced than collected. Add $23,000.

Adjusted deposits come to $1,021,000, and the four returns report sales of $1,021,000, so the bank and the returns agree. The income statement says $1,100,000. The remaining $79,000 has no deposit, no return and no document behind it. The seller says it is cash sales spent on supplies and wages without going through the bank. That may be true, but it cannot be verified, it was not reported, and a lender will not finance it.

What that does to the deal: the reconciled revenue is about 7% below the listing. At a 25% margin, the earnings the price was built on fall by about $20,000 before any other adjustment, which at a 3x multiple is a $60,000 price conversation, and the unreported sales raise a tax question that belongs in the purchase agreement.

Three things to do before you sign a letter of intent

1. Ask for the three sources for the same period: statements for every business bank account, the card processor summaries and the filed GST/HST returns. If the seller will provide only one of them, that is the first finding.
2. Reconcile revenue before you adjust earnings. The add-backs in the SDE guide on this site only mean something once the revenue line under them ties to the bank.
3. Write down every unexplained item with its amount and the document that would clear it. That list is your request to the seller, and later it shapes the representations in the purchase agreement.

FAQ

Is a proof of cash the same as a bank reconciliation? No. A bank reconciliation ties the bank balance to the ledger at one date. A proof of cash ties the money that moved over a whole period to the revenue reported for that period.

What if the business is mostly cash? Then the bank and the returns are the floor, not the ceiling, and the price should be negotiated on what the documents support. Unreported sales cannot be financed, and in a share purchase any tax exposure stays with the company the buyer now owns.

Does the lender do this for me? Lenders size the loan on documented earnings and ask for financial statements or tax returns and Notices of Assessment. They do not reconcile the seller's revenue for the buyer, and a file declined late in the process costs more than a gap found early.

Does Deal Diligence tell me what the business is worth? No. We analyze the risk in the numbers behind the price: whether the revenue ties to the bank and the returns, where the gaps are, and what the deal depends on. The price decision stays with you.

Sources

• CRA, When to register for and start charging the GST/HST ($30,000 small supplier threshold)
• CRA, GST/HST account changes and assigned reporting periods (annual, quarterly, monthly thresholds)
• CRA, GST/HST calculator and rates (British Columbia GST 5%, PST separate)
• Government of British Columbia, Provincial sales tax (7% general rate)
• CRA, Where to keep your records and for how long (six years)
• BDC, Business purchase or transfer loan (financial statements or tax returns, Notices of Assessment)

General information, verified 2026-10-28. Program and lender rules change; confirm with your lender before relying on them.