In this article, we highlight joint tax elections companies should consider filing in asset purchase transactions in Canada. These elections will not only save companies time, but they will also relieve taxpayers from hassles down the road.
A GST/HST election under section 167 of the Excise Tax Act (Canada) is one of the most commonly used elections. This joint election applies to sales where a buyer receives all or substantially all of the property that is reasonably necessary for the buyer to carry on the seller’s business or part of the seller’s business. When the election applies to an asset purchase agreement, GST/HST will generally not apply to the assets being sold under the agreement. This election will save the buyer the hassle of claiming input tax credits to recuperate GST/HST that it would have otherwise paid. The joint election can be made even if the vendor or the purchaser is a non-resident. It must be made using Form GST44 and be filed by the purchaser on or before the first GST/HST reporting date following the transaction.
When accounts receivable are sold as part of the asset sale, a joint election under section 22 of the Income Tax Act (Canada) (the Act) can be filed. The vendor is able to deduct the difference between the amount of the purchase price allocated to accounts receivable and the face value of accounts receivable. Without a section 22 election, such amount will not be fully deductible and any discount would be a capital loss. Although the purchaser will have to recognize in its income the difference between the purchase price allocated to accounts receivable and the face value of accounts receivable, the purchaser will also be able to claim doubtful or bad debts associated with accounts receivable in future years that it otherwise would not be able to claim. Parties can file a section 22 election by completing form T2022 and submitting it to the CRA in the year in which the business is sold.
Lastly, a joint election can be filed under section 20(24) of the Act if a purchaser assumes the future performance of a vendor’s obligations for which the vendor has already received payment, and consideration has been received by the purchaser for that assumption. This election will allow the vendor to deduct such payment from its income. The purchaser, on the other hand, will be required to recognize the payment in its income. The purchaser is allowed to deduct from its income any expenses related to the performance of the vendor’s obligations and to claim certain reserves otherwise unavailable. There is no prescribed form for this election, so the parties may wish to agree on a common form before making the election. In addition, the joint election is due on the earliest of the parties’ tax filing dates for the year the sale took place.
Considering the importance of these elections, it is imperative for parties in a transaction to include covenants in the purchase agreement to ensure that elections are filed on time.
The author would like to thank Lucy Lui, articling student, for her assistance in preparing this legal update.