Sale of Business Assets: Avoiding Taxes with Election 167
When you are selling the assets of a business, such as real estate, equipment, or goodwill, GST/HST is applicable in addition to the purchase price. But there are certain tax elections available which can essentially create a GST/HST wash between the parties.
Section 167 of the Excise Tax Act is a tax election that allows a business owner to defer the payment of the goods and services tax (GST) and the harmonized sales tax (HST) on the sale of the business. The election allows the business owner to defer the payment of the tax until the subsequent sale of the assets or the completion of the winding up of the business, which will happen by the buyer. That is, the seller may transfer the business to the buyer with no GST/HST payable if certain conditions are met.
Conditions to qualify for the s. 167 election of the ETA
First, the deferral is available when the business is sold in its entirety, including all assets and liabilities. Generally, this requirement is met when the buyer is acquiring ownership, possession, or use of substantially all of at least 90 percent of the business assets required as necessary to carry on the business. Second, the seller must have owned and operated/carried on the business they are selling. Third, the buyer must be a GST/HST registrant (the seller does not have to be a GST/HST registrant).
It is important to note that the election is not automatic, and the buyer must file for the election (GST44 form) on or before the end of its reporting period. Failing to file the election within the required timeframe will result in the immediate payment of the GST/HST on the sale of the business by the seller. In this cases, the seller would have to rely on an indemnity provided by the buyer on closing. The GST/HST indemnity form is a required document exchanged between buyer and seller on the closing of the asset purchase and sale transaction.
In conclusion, if you are planning to sell your business, it is important to consider the tax implications associated with the sale. By filing the s. 167 election, you may be able to avoid paying the GST/HST on the sale of your business resulting in significant tax savings. If you have any questions about the election or the sale of your business, we recommend that you consult with a business or tax lawyer.