Tax elections on the sale of a business: Avoiding GST/HST with the filing of Election 167
When selling the supplies of a business, there are certain tax elections that one should be aware regarding the payment of GST/HST in addition to the purchase price. Generally speaking, absent any tax elections, the purchaser will be required to pay GST/HST in addition to the purchase price and the vendor will be required to collect and remit the GST/HST to the government.
However, if the vendor and the purchaser make a joint election under Section 167 of the Excise Tax Act (ETA), the vendor may sell a business to a recipient with no GST/HST payable under the agreement if certain conditions are met.
The reason the CRA allows this is because it simplifies the flow of payable tax from the purchaser to the CRA. In the absence of the election, after paying GST/HST, the purchaser would likely claim input tax credits equal to the amount of the GST/HST already paid. This is essentially a wash in the eyes of the CRA.
Let’s look more closely to Election 167 to find out what condition must be met, what are the exceptions, and how to file.
What is Section 167 of the ETA?
Section 167 of the Excise Tax Act contains provisions for two elections that apply to the sale of a business and its assets. The election under subsection 167(1) applies to the sale of a business or part of a business. The election under subsection 167(2) applies to the supply of the business assets of a deceased individual.
This article will look at the part of the Act relating to the sale of a business or part of a business.
The conditions allowing for the application of 167 generally relates to the following question: are the assets of the business prospectively being sold substantial enough that they will be regarded as necessary to carry on the business? We are talking about the difference between selling all or the majority of a business’s assets—including tangibles such as equipment; intangibles such as one’s name, logo, and goodwill; and capital real property such as buildings and land—as opposed to selling a couple of assets.
Below are a list of the conditions to qualify for the election under subsection 167(1):
1. The supplier must be selling a business or part of a business that was established or carried on by the supplier, or that was established or carried on by another person and acquired by the supplier.
2. Under the agreement for the supply of the business or part of the business, the recipient must be acquiring ownership, possession or use of all or substantially all of the property (generally 90% or more) that can reasonably be regarded as being necessary for the recipient to be capable of carrying on the business or part as a business.
3. The purchaser must be a GST/HST registrant.
It is a mistaken belief that both the supplier (vendor) and the recipient (purchaser) must be GST/HST registrants. This is incorrect; only the recipient (purchaser) must be a registrant. However, where the vendor has revenue in excess of $30,000 a year, he/she will be a GST/HST registrant in any case and so this is often a moot point.
To put these conditions in real life terms, let’s consider the sale of a pizza business. Its supplies include real property—the building and parking lot—the equipment, such as ovens, dough maker, cooking equipment, the office equipment, and the cars used for deliveries. The purchaser also purchases intangibles, such as the name and goodwill (the customers that support the business). While the purchaser has to purchase new chairs and tables, these constitute less than 10% of the total value of the assets. Since the purchaser is acquiring a substantial portion of the business’s supplies and property that can be reasonably be regarded as being necessary to operate the business, he has met the test for eligibility necessary for the election.
If, however, the purchaser just purchased the oven and the office equipment, this would not constitute the “sale of a business or part of a business.” It would merely be the sale of an asset. Therefore, the purchaser would not be entitled to make the election under subsection 167(1) and the supply of the oven and office equipment would be subject to GST/HST.
Exceptions to the Applicability of Election 167(1)
As discussed previously, no GST/HST is payable for the sale of the property of a business, as long as the sale of the business meets the criteria above. However, if the taxable supply of property is leased or licensed (not sold), the GST/HST would apply. So too, if the supplier continues to offer services even after it is sold, then the services rendered by the supplier/vendor would be subject to GST/HST.
Additionally, no election can be made where a business deals in “exempt supplies” under Schedule VI of the Act, which do not require the imposition of GST/HST. However, “zero rated goods” (goods for which the GST/HST is 0% due to the supply occurring outside of Canada, as per the “place of supply” rules) do qualify for the election.
When to file for GST/HST exemption under 167(1)
It is the responsibility of the purchaser to file for the election on or before the day that the recipient would have been required to file a return for the first reporting period in which GST/HST would have become payable if the sale had been made without the election being made. In plain terms, this means the purchaser must file the GST44 before the end of its reporting period.
While it is the purchaser’s responsibility to file, it is in the best interest of the vendor to ensure that it is filed in so far that, absent the election, the vendor will be responsible to collect and remit GST/HST to the government. Where no collection and remission is made, the vendor would be liable to the CRA, and the vendor would have to rely on an indemnity provided by the purchaser for relief. Therefore, it is important that the vendor obtain confirmation that the election had been filed.
How to file for GST/HST exemption under 167(1)
The supplier (vendor) and recipient (purchaser) complete the prescribed election form, and the recipient then must file the forms with the CRA. The form can be filed electronically by a tax preparer or can be submitted to the taxpayer’s local tax filing centre. The GST44 form must be filed by the purchaser together with his GST/HST return for the reporting period in which the acquisition was made.
The reporting period can be monthly, quarterly or annually so be sure to consult with your accountant regarding the reporting period. If the reporting period is monthly, the filing obligation could be triggered fairly quickly after closing.
Conclusion
When selling or purchasing a business, it is in your best interest to know which tax elections are relevant to you so that you pay as little tax as possible. Contact a lawyer at Kalfa Law Firm today to assist you and guide you if you are selling or purchasing a business.
FAQs
-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.
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