Does GST/HST change when a business purchase price is adjusted after closing?

A purchase agreement can provide for the price to change after closing, for example when the final working capital or inventory figures differ from an estimate. Whether the GST/HST changes with it depends on whether tax was charged on the sale in the first place. Section 232 of the Excise Tax Act deals with the case where it was. This page covers only that change after closing, not whether tax applies to a business sale at all, which is covered in GST/HST on a business sale.

What section 232 says about a reduced price

Section 232(2) applies where a person has charged to, or collected from, another person tax calculated on the consideration for a supply and the consideration is subsequently reduced, for any reason. The person “may”, in or within four years after the end of their reporting period in which the consideration was reduced, adjust the tax charged, if it was charged but not collected, or refund or credit the tax, if it was collected. The adjustment is on the portion of tax calculated on the amount of the reduction. The section is permissive; it does not say the seller must refund. Under section 232(4), the section does not apply in circumstances in which section 161 or 176 applies, so ask your accountant whether either applies to your sale.

Credit and debit notes

Under section 232(3), a seller who adjusts, refunds or credits an amount under section 232(2) must, within a reasonable time, issue a credit note with prescribed information, unless the buyer issues a debit note for the amount. The seller may deduct the amount in working out its net tax for the period in which the note is issued or received, to the extent the amount was included in its net tax for that or an earlier period. The buyer adds the amount in its net tax for the period in which it issues the debit note or receives the credit note, to the extent the amount was included in an input tax credit it claimed in a return for an earlier period. Section 232(3)(d) adds a repayment rule where the amount was included in a rebate already paid to the buyer. Ask your accountant which reporting period applies.

When the section 167 election was made

Where a business or part of one is supplied and, under the agreement, the buyer acquires ownership, possession or use of all or substantially all of the property that can reasonably be regarded as necessary to carry it on as a business, section 167(1) lets the seller and buyer make a joint election, except where the seller is a registrant and the buyer is not. Under section 167(1.1), if they elect and the buyer, if a registrant, files the election on time, no tax is payable on supplies made under the agreement other than a taxable supply of a service to be rendered by the seller, a taxable supply of property by lease, licence or similar arrangement, and, where the buyer is not a registrant, a taxable sale of real property. CRA form GST44 is the form to elect not to have GST/HST apply to the sale of a business or part of one. For the supplies the election covers, no tax is payable, so section 232 has no tax on them to adjust; it can still matter for the excepted supplies if tax was charged on them. The conditions are set out in how a business sale qualifies for the section 167 election.

What this page does not cover

BDC notes that there will also usually be purchase price adjustments for the condition of the business on the day you take it over, so check whether your agreement says how any later tax change is handled between buyer and seller. This page says nothing about a price increase; ask your accountant how an increase is treated. Ask the same about any provincial tax that may apply to your sale.