Canada: GST/HST & Asset Sales: The Section 167 Election


The goods and services tax ("GST") is a value-added tax charged on most supplies made in Canada of goods, services, real property and intangible property.  The GST is charged at a rate of 5% on the value of the consideration for a taxable supply.  The harmonized sales tax ("HST") is basically the GST charged at a higher rate.  It applies to taxable supplies made in participating provinces.  The participating provinces use the HST in lieu of implementing their own provincial sales tax schemes.  The HST ranges from 13% to 15% depending on the participating province.

Property sold through the asset sale of a business will generally be subject to GST/HST because personal property used in a commercial activity is deemed to be a taxable supply when sold or leased.  Commercial real property is also a taxable supply when sold or leased.

However, the Excise Tax Act ("ETA") contains many relieving provisions that can prevent GST/HST from applying to an asset sale.  This article will discuss one of those relieving provisions:  The section 167 election.  It can apply regardless of whether a vendor or a purchaser is a resident of Canada.  Therefore, it can even be used when a non-resident is purchasing a Canadian business by way of asset sale, provided the conditions discussed below are met.

Conditions for a Section 167 Election to Apply

The conditions that must be satisfied before a section 167 election can apply are as follows:

  • If the vendor is a registrant, the purchaser must also be a registrant;
  • The vendor is supplying a business or part of a business;
  • The vendor established, carried on, or acquired the business or part of a business;
  • Under an agreement, the purchaser is acquiring all or substantially all of the property that is reasonably necessary for the purchaser to carry on the business or part of a business; and
  • A joint election is made by the vendor and purchaser.

The joint election is made using Form GST44: Election Concerning the Acquisition of a Business or Part of a Business (the "GST44").  The GST44 only has to be filed if the purchaser is a registrant.  If required to be filed, the GST44 must be filed for the purchaser's first reporting period in which the tax would, but for the section 167 election, have become payable in respect of the supply.  The CRA has a discretionary power to extend the filing deadline.

There are several traps associated with the GST44.  First, the GST44 must be filed if the purchaser is a "registrant".  A registrant includes a person who is required to register for GST/HST purposes but has not.  Therefore, there is a risk in not filing the GST44 because the purchaser may have been required to have been registered at the time of the asset sale but did not realize.  This could cause the GST44 to not be filed on time which, in turn, would cause the asset sale to be taxable.  Second, purchasers sometimes do not file the GST44 even when required.  In fact, the few court cases concerning the section 167 election involve, amongst other things, GST44s that were not filed or not filed on time.

Note, goodwill is not subject to GST/HST if bullet points 2, 3 and 4 above are satisfied and part of the consideration for the supply can reasonably be attributed to goodwill of the business or the part of the business.  No election is required, and it is irrelevant whether the vendor and purchaser are registrants. 

Business or Part of a Business

The Canada Revenue Agency ("CRA") takes a restrictive approach to what constitutes a business or part of a business.  The CRA position is important because there are few court cases on the subject to provide guidance.  Also, the ETA does not define the term "part of a business".  For those reasons, practitioners generally adhere to the CRA's position.

The CRA's position on what constitutes a business is set out in GST/HST Memorandum 14.4, "Sale of a Business or Part of a Business" ("GST/HST, Memo 14.4").

The assets of a business generally include real property, equipment, inventory, and intangibles such as goodwill.   In general, the supply of one or more individual assets will not be considered a supply of a business.  The nature of a business will generally determine the package of assets that would constitute the supply of a business or part of a business.  Generally, there is no one type of property, regardless of its value, that alone would determine that there is a supply of a business. 

The CRA's position on what constitutes part of a business is also set out in GST/HST Memo 14.4.

In general, a "part of a business" is an activity that may be a functionally and physically discrete operating unit, or it may be an activity that supports or is related to the broader business, but is organized as a separate activity that is capable of operating on its own.  The guidelines that apply when determining if there is a supply and acquisition of a business also apply when determining if there has been a supply and acquisition of "part of a business".

In other words, the CRA's administrative position is that part of a business means a franchise or branch of a business that can function as a business on its own and has its own assets, location and goodwill.

Note, there is no statutory requirement that the business or part of a business be a going concern, but there is some CRA commentary to the opposite effect.  There is also no requirement that the purchaser ever operate the business or part of a business.  A purchaser is free to combine the business or part of a business with the purchaser's existing business.

All or Substantially All of the Property Required to Carry on the Business

It can be surprisingly difficult to answer the question of whether "the recipient is acquiring ownership, possession or use of all or substantially all of the property that can reasonably be regarded as being necessary for the recipient to be capable of carrying on the business or part as a business". 

The phrase "all or substantially all" is used throughout the ETA and Income Tax Act.  The CRA's longstanding position is that the phrase means 90% or more.  However, courts have interpreted that phrase differently, finding that less than 90%, in some cases as low as 80%, qualifies as substantially all.  The CRA's position is that the determination of whether the all or substantially all requirement is satisfied does not take into account property already owned by the purchaser.

The ETA simply states that the purchaser must take "ownership, possession or use" of the required amount of property.  There is no requirement that the purchaser buy the property.  The all or substantially all requirement can be satisfied if, under the agreement, the purchaser leases some of the property rather than simply purchasing all of the property.  Note, GST/HST will apply to the lease because a section 167 election does not prevent GST/HST from applying to leases.  This is discussed in greater detail below.

The all or substantially all test can be difficult to apply when real property necessary for the purchaser to carry on the business is not purchased or leased from the vendor.  Also anomalous results can occur.  Normally, the all or substantially all test will not be satisfied if real property is purchased separately from the other business assets.  Real property is so expensive that it will be unusual for its purchase price to not constitute more than 10% of the value of the property necessary to carry on a business.  However, the all or substantially all test would appear to be satisfied if the real property was leased for market rents instead of purchased.  Such a lease arguably has a value of $0 and would not constitute more than 10% of the value of the property necessary to carry on a business.  The CRA has not provided clear guidance on this subject.

Specific Exclusions

When a section 167 election applies to an agreement, GST/HST generally will not apply to the supplies made under that agreement.  However, GST/HST will apply to the following supplies even if made under an agreement subject to a valid section 167 election:

  • a taxable supply of a service that is to be rendered by the vendor;
  • a taxable supply of property by way of lease, licence or similar arrangement; and
  • where the purchaser is not a registrant, a taxable supply by way of sale of real property.

Furthermore, when a section 167 election applies, the vendor is deemed to have made a separate supply of each property and service that is supplied under the agreement for consideration equal to that part of the consideration for the supply of the business or part of a business that can reasonably be attributed to that property or service.  This causes a reasonable portion of the purchase price to be attributable to any property or service that falls within one of the three above noted exceptions, and GST/HST will apply to any such portion of the purchase price.

The above exceptions cause problems for franchises.  Often a franchise is purchased for a lump sum.  The franchise will include tangible assets, licenses for intangible personal property (e.g., trade-marks) and vendor training.  The tangible assets will not be subject to GST/HST if a valid section 167 election is made.  However, the licenses and services will be subject to GST/HST.  So, part of the purchase price needs to be allocated to the licenses and services and GST/HST charged on that amount.

Another problem area is restrictive covenants given by vendors selling their businesses.  The CRA considers the supply of a restrictive covenant to be a supply of a service, and it is likely correct.  The Manrell v. Canada decision held that a restrictive covenant is not property within the ordinary meaning of that word.  That appears to make a restrictive covenant a service for purposes of the ETA because of how the term service is defined.  The ETA defines service as anything other than property, money and anything supplied by an employee to an employer in the course of the employment relationship.  Since a restrictive covenant is a service, a section 167 election will not prevent GST/HST from applying to a reasonable portion of the purchase price attributable to the restrictive covenant.

Use of a Section 167 Election Where Not Applicable

There are several consequences if a section 167 election is used in circumstances where it is not applicable.  First, a vendor will be liable for the uncollected GST/HST on all the assets other than real property sold to a purchaser registered for GST/HST purposes.  However, a vendor should normally be able to recover such GST/HST from a purchaser after the vendor is reassessed by the CRA.  A purchaser may be able to claim input tax credits ("ITCs") to offset the GST/HST paid.  A vendor will be assessed interest on the amount of GST/HST it failed to collect.  The rate of interest is currently 5% and compounds daily.  The CRA has a policy to reduce the amount of interest to 4% in certain circumstances called a wash transaction where the purchaser would be entitled to ITCs. 

Second, a purchaser registered for GST/HST purposes has to self-assess GST on the purchase of real property.  A purchaser will be liable for GST/HST it fails to self-assess, but such GST/HST may be offset by ITCs.  A purchaser can be assessed interest on the amount of GST/HST it failed to self-assess.  The CRA may waive interest owing if offsetting ITCs are available.


Many people assume the section 167 election is relatively simple and straightforward in its application.  However, determining whether the election applies can be challenging as shown above.  Furthermore, this article has not even addressed the provisions that sync the section 167 election with the ETA's change-in-use rules.  Amongst other things, those provisions can cause GST/HST to apply to assets subject to a section 167 election that are subsequently used in non-commercial activities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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