Section 22 Election: Tax Deductions for Bad Debt When Selling a Business in Canada
When you sell a business in Canada through an asset transaction, the sale price typically includes outstanding accounts receivable money customers owe the business but haven’t paid yet. Some of those receivables may be uncollectible. Without a specific election, the seller faces an unpleasant tax result: the full face value of receivables is included in income when originally earned, but any loss from selling them below face value is treated as a capital loss, only 50% deductible.
Section 22 of the Income Tax Act provides a joint election that converts the receivables transaction from capital to income treatment. The seller deducts the discount fully as an income deduction, not a capital loss, and the buyer includes a corresponding amount in income when the receivables are eventually collected. The result is that both parties get appropriate tax treatment, and the seller isn’t penalized for transferring receivables that were worth less than their face value.
Section 22 is relevant only to asset sales. When a business is sold through a share purchase where the buyer acquires the shares of the corporation rather than its individual assets, the receivables stay inside the corporation, and no transfer occurs. If you’re considering whether to structure your transaction as an asset sale or share sale, see our overview of buying and selling a business and our sale of business service page for the broader tax and structural considerations.
When a Section 22 Election Is Available
The election is available when all of the following conditions are met.
The vendor must have been carrying on a business in Canada. The sale must include all or substantially all of the assets used in that business; a partial asset sale doesn’t qualify. CRA generally interprets “substantially all” to mean 90% or more of the fair market value of the business assets, though this is applied to the facts of each transaction. The assets sold must include all outstanding accounts receivable that were previously included in the vendor’s income from the business (if the business involved lending, all outstanding loans must be included as well). And the purchaser must intend to continue carrying on the business, not simply wind it up or purchase the assets for unrelated purposes.
Finally, both parties must jointly execute a formal election specifying the consideration allocated to the receivables. That consideration becomes the binding price for both parties’ tax purposes, though the CRA may challenge the allocation if it doesn’t reflect fair market value. The receivables allocation is also part of the broader purchase price allocation exercise under Section 68 of the Income Tax Act, which governs how the total asset sale price is attributed among different categories of assets. In any M&A asset transaction, Section 22 and Section 68 should be planned together.
How Section 22 Affects the Vendor
Without a Section 22 election, a vendor who sells receivables at a discount faces two problems. First, the doubtful debt reserve the vendor had previously claimed must be brought back into income in the year of sale. Second, the discount, the difference between face value and what the buyer actually paid, becomes a capital loss, of which only 50% (the allowable capital loss portion) is deductible against capital gains.
With the election, the vendor deducts the entire discount as an income loss fully deductible against business income in the year of the transaction. This is significantly more valuable than a capital loss, particularly for sellers in high tax brackets or with limited capital gains to offset.
Worked example vendor-side:
A vendor’s accounts receivable have a face value of $100,000. Some are doubtful, and the purchaser agrees to pay only $80,000 for the portfolio. The discount is $20,000.
Without Section 22, the $20,000 discount is a capital loss. At a 50% inclusion rate, only $10,000 is deductible and only against capital gains, which the vendor may not have. The doubtful debt reserve is also brought into income.
With Section 22, the full $20,000 discount is deductible as an income loss in the year of sale, 100% of it, against ordinary business income. The doubtful debt reserve issue is also resolved through the election mechanics.
How Section 22 Affects the Purchaser
The mirror treatment applies on the buyer’s side. The amount the vendor deducts the discount is included in the purchaser’s income. But this isn’t a cost to the buyer in practice, because the buyer purchased the receivables for $80,000 and will collect $100,000, so the $20,000 is genuinely income to the buyer.
Worked example purchaser side:
The purchaser pays $80,000 for receivables with a face value of $100,000. When the purchaser collects the full $100,000, the $20,000 difference is income, which aligns with the Section 22 inclusion.
If the purchaser fails to collect some or all of the receivables, they can claim a deduction for uncollectible amounts under paragraph 20(1)(p) of the ITA. However, the portion the vendor already deducted under Section 22 reduces the amount available to the purchaser. In other words, the deduction doesn’t get claimed twice; the system is designed to share the tax relief between the parties in proportion to who bears the economic loss.
This mirror treatment makes the Section 22 election a negotiating point in asset transactions. Buyers generally benefit from the election because they get income treatment (with corresponding deduction rights) on receivables they ultimately can’t collect. Both parties benefit from clarity, which is why well-advised sellers and buyers include the Section 22 election along with the Section 68 allocation as a standard term in the asset purchase agreement.
Filing Requirements: Form T2022 and Timing
To make a valid Section 22 election, the vendor and purchaser must jointly complete and sign Form T2022 – Election in Respect of the Sale of Debts Receivable. Two signed copies are required each party retains one and files it with their respective CRA tax center.
The critical timing requirement: the T2022 must be filed for the tax year in which the sale occurred, not at closing. If the asset sale closes in November and the vendor’s fiscal year ends December 31, the election must be filed with the vendor’s tax return for that December 31 year-end. Missing that deadline means the election is invalid and both parties lose the benefit.
This is one of the most common mistakes in asset transactions: the election is discussed and agreed upon in the purchase agreement, but it doesn’t get filed at tax time because the accountant wasn’t looped in at the right moment or because the T2022 was overlooked in the deal mechanics. The purchase agreement should specify that both parties are committed to executing and filing the election, and both parties’ advisors should have the filing deadline on their calendars well before year-end.
Section 22 in the Context of the Broader Asset Sale
Section 22 doesn’t stand alone in a business asset sale. It intersects with two other elections that are typically dealt with at the same time.
Section 68 governs the allocation of the total purchase price among the different asset categories: inventory, equipment, goodwill, receivables, and restrictive covenants. The CRA can challenge allocations that don’t reflect fair market value, and the allocation of consideration to receivables for Section 22 purposes must be consistent with the Section 68 allocation. For more on how purchase price allocation works and the tax consequences for each asset class, see our article on Section 68 purchase price allocation.
Section 167 is the GST/HST election that allows the sale of a business’s assets to be treated as falling outside the scope of GST/HST where the buyer is acquiring all or substantially all of the assets and will continue the business. This election is relevant to the same transaction and should be considered alongside Section 22.
For any business asset sale, these three elections, Section 22, Section 68, and Section 167 are best dealt with as a coordinated package, with the legal team and accounting team aligned from the outset of the transaction. Kalfa Law Firm advises on the full suite of elections and structuring considerations in business sale transactions, working alongside your accountant to ensure nothing falls through the cracks at year-end.
Speak With a Business Sale Lawyer at Kalfa Law Firm
Kalfa Law Firm advises vendors and purchasers on asset sale structuring, including Section 22, Section 68, and Section 167 elections, across Ontario and Canada.
Related Reading
Sale of Your Business · Section 68 Purchase Price Allocation · Buy-Sell a Business · Corporate Tax Planning · Planning Acquisition or Sale Strategies
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-Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law Firm. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.
© Kalfa Law Firm 2021. Updated September 7, 2026.
