If you expand your business through an acquisition, you do not pay any GST/HST.

To facilitate the growth and expansion of business in Canada, the federal government permits the sale of a business without the purchaser having to pay the GST/HST. This exemption is of enormous importance to small or medium-sized businesses since a requirement to pay GST/HST at the time of purchase or shortly thereafter could have such an enormous impact on operating cash flows that it might impair current activity or put undue pressure on the company’s line of credit.

What is a Business?

This exemption is permitted under Subsection 167 (1) of the Excise Tax Act, which allows the sale of a business or part of it without the sale being subject to GST/HST. Business is broadly defined in Subsection 123 (1) of the Act to include “a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement, but does not include an office or employment”. The business must have been either established or acquired by the seller.

To be eligible for the exemption, the purchaser must acquire “ownership, possession or use of all or substantially all the property that can reasonably be regarded as being necessary for the recipient to be capable of carrying on the business or part of a business”. The Canada Revenue Agency (CRA) interprets “all or substantially all” as 90% or more.^[1] The effect of this interpretation is to prevent assets being sold off piecemeal without the payment of GST/HST.

What is Property?

The definition of property is very comprehensive and includes both real and personal property, movable and immovable, tangible and intangible. It also includes rights and interests of any kind as well as shares. It does not, however, include money.

Eligibility Tests for Exemption

There are two tests to determine whether the subject of the transaction is a business within the meaning of the Act. The first test is to determine whether the business includes activities that fall within the definition of a business under Subsection 123 (1) referred to above. Assets of such businesses generally include real property, equipment, inventory and intangibles such as goodwill. The second test is to establish whether the purchaser is acquiring from the vendor at least 90% of the property required to carry on the business. For example, office furniture that is old and worn might not be wanted by the buyer and be excluded from the purchase since the purchaser may already own sufficient office furniture or can easily purchase new furniture from a supplier. Provided the purchaser is buying 90% of the assets reasonably required to carry on the business, the transaction has passed the second test.

Who Can Apply for Exemption?

Once eligibility has been established, it is necessary for the buyer and seller to jointly complete form GST44, “Election Concerning The Acquisition Of A Business Or Part Of A Business” (the “Election”). If this form is filed, the vendor does not need to pay and the purchaser does not need to collect any GST/HST on the transaction. The exemption may apply where the purchaser and vendor are both registrants for GST/HST or where both the purchaser and vendor are not registrants.  The election does not apply, for example, where the vendor is a registrant but the purchaser is not a registrant. A non-registrant is anyone not currently registered whose revenues from taxable sales or services did not exceed $30,000 in the four calendar quarters preceding the transaction quarter ($50,000 in the case of public service bodies).

The Form

Both purchaser and vendor complete the Election indicating the names and business numbers of the purchaser as well as the vendor along with address, telephone number and the names of the contact persons for both the buyer and the seller. A description of the purchased property is required. Since the transaction value is treated as nil for tax purposes, the Election form does not ask for the fair market value.

Submitting the Election

Form GST44 must be filed by the purchaser (if a registrant) on or before the date to file a return for the first reporting period in which GST/HST is normally payable following the purchase. Businesses that file GST/HST electronically should send form GST44 to their designated business tax centre. Before forwarding the form both buyer and seller should maintain copies of the form. It may be advisable for both purchaser and seller to sign four “originals” to allow both buyer and seller to maintain signed copies while sending “originals” to the CRA. Where both the purchaser and vendor are not registrants and are only engaged in exempt activities, the GST 44 Election form does not need to be filed with the CRA but should be completed and kept on file in case of an audit.

Exceptions

As noted above, the Election does not apply to the sale of individual assets from the vendor to a purchaser. These transactions would attract the normal payment/collection of GST/HST. The Election only applies in those situations where the part of a business’s assets that are sold could be considered functionally and physically separate from the whole business. For instance, a company is engaged in landscaping during the summer and snow removal during the winter. Management decides to get out of the snow-removal part of the business and sell the snow-removal equipment and all other assets required to carry on the snow-removal business. If the equipment were sold as a package, the sale should qualify for the Election since the equipment would be considered essential for carrying on the snow-removal business and not just machinery for sale piecemeal to anyone for any purpose.

Seek Professional Advice

Since these transactions are complex, anyone contemplating buying another business should get advice from their lawyer as well as their chartered accountant to ensure the documentation supports the intent of both parties and satisfies the requirements for GST/HST filing and business tax filing at the end of the fiscal year.