Does the section 22 election apply to a share purchase?

Section 22 comes up in business-sale negotiations because it deals with accounts receivable, which are often a large part of what a small business owns. It is a rule in the federal Income Tax Act, and it is written around one situation: an owner who sells the property used in a business, receivables included, to someone who will carry the business on.

What the election does

Where a person who has been carrying on a business sells all or substantially all of the property used in it, including outstanding debts, to a purchaser who proposes to continue the business, the two can sign a joint election in the prescribed form. The vendor may then deduct the difference between the debts’ face value and the price paid for them, and the purchaser includes that same difference in income.

Why a share purchase falls outside it

In a share purchase the shareholders sell their shares and the company carries on as before. The company does not sell its property or its debts to anyone, so the conditions in section 22 are not met and there is nothing for the two sides to elect. The receivables stay inside the company, and their value reaches the buyer through the price of the shares rather than through a separate sale.

Where the question still matters

If the deal is restructured as an asset sale, section 22 comes back into play, along with other elections tied to the sale of a business’s property. The CRA describes a GST/HST election on the sale of a business or part of a business, which the purchaser files and which has conditions of its own. Whether to make either election is a question for the accountants on both sides.

What a share buyer checks instead

A buyer of shares takes the company’s receivables as they stand, including any that will not be collected. The work moves to due diligence: ageing, collection history, and how the share price and any working-capital adjustment treat them. What to check in accounts receivable sets out the questions.