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.
Norton Rose Fulbright Canada LLP
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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