What is section 22?
When selling the debts of your business, section 22 of the ITA provides a remedy to reduce the loss incurred from debts that will not be recovered. It can be elected when a vendor sells all or substantially all of the assets of a business that it carried on in Canada to a purchaser that proposes to continue the business. The business assets that are sold must include all the accounts receivable of the vendor that are outstanding at the time of the sale.
What are the requirements for electing section 22?
The requirements for making an election under section 22 include the following:
- The vendor carried on a business in Canada;
- All or substantially all of the property that was used in carrying on the business must be sold. Therefore, the section does not apply to a disposal by way of gift;
- The sold property must include all the outstanding debts that are included in the vendor’s income for the year of sale or previous year;
- If the business was moneylending, the sold property must include all the outstanding loans;
- The purchaser must propose to continue the business;
- The vendor and the purchaser must jointly execute an election in prescribed form. The election must specify the consideration that is paid for the accounts receivable and loans.
How much of bad debt can a vendor recover through section 22?
The deduction that can be claimed by a vendor through section 22 is the difference between the face value of the debts and the consideration received for them. In other words, where the accounts receivable are sold at a discount from the face amount, the Vendor should be entitled to claim a deduction equal to the amount of the discount.
How does section 22 impact the purchaser?
The amount that the vendor is allowed as a deduction in the year of sale must be included in the purchaser’s income in the year of purchase. In other words, the Purchaser will be required to include an amount in income equal to the difference between the face amount of the accounts receivable and the allocated portion of the purchase price paid to acquire them, since that would be a gain and hence income.
What form needs to be filed when making a section 22 election?
When filing under section 22, both vendor and purchaser make a joint election and sign Form T2022. Two copies must be completed and sent to the vendor’s and purchaser’s tax centre for the tax year that includes the date of the sale. Visit this link to find the form.
