Introduction – GST/HST and Sale of a Business
Most taxpayers contemplating the purchase or sale of a business are aware that the transaction will have Canadian income tax consequences. Far fewer taxpayers are aware of the potential GST/HST consequences. The Canadian Excise Tax Act requires businesses to collect GST/HST from their customers when they make taxable supplies to their customers. A taxable supply is any good or service you normally sell to anyone else for business purposes, in other words to generate revenues or sales. Businesses also track how much GST/HST they pay for the goods and services they purchase for their business because that allows them to claim input tax credits for the amounts paid. After the end of each reporting period, businesses are required to prepare a GST/HST return that totals the amount of GST/HST collected by the business and subtracts from that the total input tax credits claimed during the reporting period. The business is then required to remit that amount of money to the Canada Revenue Agency (“CRA”).
Section 167 Election – GST/HST and Sale of a Business
The sale of a business is a taxable supply and so it gives rise to an obligation for the vendor to collect GST/HST from the purchaser and then ultimately remit part or all of that money to the CRA. However, when certain requirements are met, the purchaser of a business and the vendor of the business can make a joint election under section 167 of the Canadian Excise Tax Act which results in no GST/HST being payable on the transaction.
A number of requirements must be met in order to qualify for the section 167 election. First, the purchaser must be buying a business or part of a business. Second, that business needs to have been established or carried on by the vendor or established or carried on by another person and then later acquired by the vendor. Third, the agreement to purchase the business must provide for the purchaser to acquire ownership of all or substantially all of the property that can be reasonably be regarded as being necessary for the purchaser to be capable of carrying on the business. Given that the requirements are met, the purchaser and the vendor must both execute the election form, and then the purchaser must file the election form on or before the day the purchaser was required to file a GST/HST return for the reporting period in which the transaction took place.
If the vendor and purchaser submit the joint election, the Canadian Excise Tax Act deems the vendor to have made a supply of each property and service supplied under the agreement of purchase and sale for the transaction separately. Although the election means that no tax is payable on most of the supplies that occur in a business purchase transaction, the Canadian Excise Tax Act carves out three categories of supplies that are still subject to GST/HST even when the election is made. First, taxable supplies of a service that is to be rendered by the supplier are still taxable. Second, a taxable supply of property from the vendor by way of a lease, licence or similar agreement is still taxable. Finally, if the purchaser is not a GST/HST registrant and the vendor makes a taxable supply of real property, that supply is still subject to tax.
Tax Tips – Sale of a Business Section 167 Election
It is normally advantageous for the purchaser not to have to pay GST/HST on the purchase of a business and for the vendor to not be required to collect GST/HST on the transaction. As a result, it is important to be aware that the section 167 election exists. It is also important to know the conditions of its applicability and the deadline that the election must be made by in order to properly use the election. If you are unsure if you can use the section 167 election in a transaction you are undertaking, please consider contacting one of our expert Toronto tax lawyers.