Have you ever wondered if the sale of your business or the acquisition of a target’s business (including its goodwill) is subject to GST/HST?
Well I asked Mona Tessier, Partner of Indirect Tax at Welch LLP and she said the “simple answer is yes, however, there is a special election that the seller and buyer can enact to avoid collecting/paying this tax”.
The Excise Tax Act
Section 167 of the Excise Tax Act applies when a seller makes a sale of a business or part of a business that is carried on by the seller and the purchaser is acquiring ownership, possession or use of substantially all (usually understood to mean 90%) of the property that can reasonably be regarded as being necessary for the purchaser to be capable of carrying on the business or part as a business.
When the sale involves a “part of a business”, in determining whether section 167 could apply, one would have to consider whether the “part of a business” can be identified as a separate business that is carried on by the seller. For example, it has its own employees, its own customers, its own equipment and its own location. As long as the purchaser is acquiring ownership, possession or use of substantially all of the property that can reasonably be regarded as being necessary for the purchaser to be capable of carrying on the part of the business as a business and the other conditions are met, the election can be made and there would be no requirement to collect HST in respect of the sale. Otherwise, HST would apply to all of the taxable property (i.e., the equipment, inventory and goodwill).
Is There any Associated Risk to Filing the Election?
Although the election primarily benefits the purchaser, it is the vendor that is at risk if CRA decides the transaction does not meet the requirements of section 167 (i.e., the 90% test was not met) since CRA will assess the vendor for the tax not collected and then it will be up to the vendor to recover the tax from the purchaser.
The determination of whether the 90% test has been met is a question of fact but generally, the purchaser would need to be capable of carrying on the same kind of business that was carried on by the vendor with the property that the purchaser acquired under the agreement.
Assets of a business generally include real property, equipment, inventory and goodwill.
If you have any further questions relating to the sale of your business, please let us know, as we’re here to help!
Special thanks to Mona Tessier as well as Welch LLP for helping with this article!
Have you ever wondered if the sale of your business or the acquisition of a target’s business (including its goodwill) is subject to GST/HST?
Well I asked Mona Tessier, Partner of Indirect Tax at Welch LLP and she said the “simple answer is yes, however, there is a special election that the seller and buyer can enact to avoid collecting/paying this tax”.
The Excise Tax Act
Section 167 of the Excise Tax Act applies when a seller makes a sale of a business or part of a business that is carried on by the seller and the purchaser is acquiring ownership, possession or use of substantially all (usually understood to mean 90%) of the property that can reasonably be regarded as being necessary for the purchaser to be capable of carrying on the business or part as a business.
When the sale involves a “part of a business”, in determining whether section 167 could apply, one would have to consider whether the “part of a business” can be identified as a separate business that is carried on by the seller. For example, it has its own employees, its own customers, its own equipment and its own location. As long as the purchaser is acquiring ownership, possession or use of substantially all of the property that can reasonably be regarded as being necessary for the purchaser to be capable of carrying on the part of the business as a business and the other conditions are met, the election can be made and there would be no requirement to collect HST in respect of the sale. Otherwise, HST would apply to all of the taxable property (i.e., the equipment, inventory and goodwill).
Is There any Associated Risk to Filing the Election?
Although the election primarily benefits the purchaser, it is the vendor that is at risk if CRA decides the transaction does not meet the requirements of section 167 (i.e., the 90% test was not met) since CRA will assess the vendor for the tax not collected and then it will be up to the vendor to recover the tax from the purchaser.
The determination of whether the 90% test has been met is a question of fact but generally, the purchaser would need to be capable of carrying on the same kind of business that was carried on by the vendor with the property that the purchaser acquired under the agreement.
Assets of a business generally include real property, equipment, inventory and goodwill.
If you have any further questions relating to the sale of your business, please let us know, as we’re here to help!
Special thanks to Mona Tessier as well as Welch LLP for helping with this article!
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