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: https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t2022.html

Section 22 Tax Deduction: Bad Debt Relief When Selling a Business

Tax Deductions for Bad Debt Under Section 22 What Business Sellers Need to Know

When selling a business, your assets often include accounts receivable, some of which may be uncollectible. To prevent business owners from bearing the full financial loss of these bad debts, the Canada Revenue Agency (CRA) provides a remedy through Section 22 of the Income Tax Act.

A Section 22 election allows vendors and purchasers to treat the sale of accounts receivable as income rather than capital, enabling the vendor to deduct bad debts fully rather than face a reduced capital loss. If you’re selling a business in Canada, understanding how Section 22 works can significantly impact your tax outcome.

When Can a Section 22 Election Occur?

A Section 22 election applies when a vendor sells all or substantially all of the assets used in carrying on a business in Canada to a purchaser who intends to continue operating that business.

For a valid S.22 election:

The vendor carried on a business in Canada.
All or substantially all business property is sold (not by gift or partial transfer).
The sold assets must include all outstanding accounts receivable previously included in the vendor’s income.
If the business were a lending operation, all outstanding loans must be included.
Purchaser must intend to continue the business.
Vendor and purchaser must jointly execute a formal S.22 election specifying the consideration allocated to the receivables.

The value assigned to the receivables in the election is final for both parties but may be challenged by the CRA if it does not reflect fair market value.

Impact of Section 22 on the Vendor

Section 22 allows the vendor to deduct the difference between:

The face value of the accounts receivable, and
The consideration received for them.

This means:

If receivables are sold at a discount,
The vendor can deduct 100% of that discount, treating it as an income deduction.

This is more favourable than a capital loss, of which only 50% is deductible.

Example

Receivables face value: $10,000
Sold to purchaser for: $7,000
Vendor deduction under S.22: $3,000

Without section 22:

The vendor must include the doubtful debt reserve in income
Vendor’s loss is a capital loss (only 50% deductible)

Impact of Section 22 on the Purchaser

Whatever amount the vendor deducts must be included in the purchaser’s income.

Using the same example:

The purchaser buys receivables for $7,000
Collects $10,000
The difference ($3,000) is taxable income to the purchaser

If the purchaser fails to collect the full amount, they can claim a deduction for the uncollectible portion under paragraph 20(1)(l) or 20(1)(p), except for the portion the vendor already deducted.

What Happens If You Don’t Use a Section 22 Election?

Without a Section 22 election:

The vendor must include the doubtful debt reserve in income
Any loss from selling receivables below face value becomes a capital loss
Only 50% of the loss is deductible
The vendor does not receive full tax relief
The purchaser may face mismatched tax treatment

In short, both parties may lose tax advantages when S.22 is not used.

How to File a Section 22 Election

To make a valid S.22 election:

Vendor and purchaser must jointly complete Form T2022 – Election in Respect of the Sale of Debts Receivable
Two copies must be filed
Copies must be submitted to both parties’ tax centres
Filing must be done for the tax year that includes the sale date

Conclusion

A Section 22 election is an invaluable tool for both vendors and purchasers when transferring accounts receivable as part of a business sale. It ensures:

Full tax deductibility for vendors
Proper income recognition for purchasers
Conversion of the transaction from capital to income treatment
Elimination of the doubtful debt reserve inclusion

Before completing a business sale, always ensure you’re maximizing the available tax benefits.

Thinking about selling your business or transferring accounts receivable? Section 22 can save you thousands in taxes, but only if applied correctly.

Contact Kalfa Law Firm today to ensure your Section 22 election is properly structured, compliant, and optimized for your best tax outcome.

FAQs

What is Section 22 of the Income Tax Act?

Section 22 allows vendors and purchasers of a business to treat the sale of accounts receivable as income rather than capital, enabling the vendor to deduct the full amount of bad debt when receivables are sold at a discount.

When can a Section 22 election be made?

A Section 22 election is available when a vendor sells all or substantially all the assets of a Canadian business, including all accounts receivable to a purchaser who intends to continue operating the business.

How much bad debt can a vendor recover under Section 22?

The vendor may deduct the difference between the face value of the receivables and the sale price received, allowing full deduction of the discounted portion.

How does Section 22 affect the purchaser?

The purchaser must include in income the difference between the face value and the purchase price of the receivables. If some receivables remain uncollectible, the purchaser can claim a deduction for the bad debt.

What form is needed to file a Section 22 election?

Both parties must complete and sign Form T2022, filing two copies with their respective tax centres for the year in which the sale occurred.

-Shira Kalfa, BA, JD, Partner and Founder