How do we qualify for a section 167 HST election on a business sale?

Section 167 of the Excise Tax Act is the rule behind the GST/HST election on a business sale, and it works as a set of tests: the sale must be of a business or part of one, the buyer must take enough of the property to run it, and the parties’ registration status must fit.

A business, or a part of one

The supply must be of a business or part of a business that the supplier established or carried on, or that another person established or carried on and the supplier acquired. The CRA says a seller may be able to elect on the sale of part of a business and points to Form GST44 for what counts as a part. The CRA says the election cannot be used if you sell only individual assets of your business.

The buyer must acquire enough to carry it on

Under subsection 167(1), the buyer must acquire ownership, possession or use of all or substantially all of the property that can reasonably be regarded as necessary to be capable of carrying on the business or part as a business. The provision states no percentage for “substantially all”, so list what is needed to run the business and compare it with what the agreement actually transfers.

Registration status and filing

The Act allows the joint election except where the supplier is a registrant and the recipient is not, and the CRA says the same. A buyer that is a registrant files the election by the due date of its return for the first reporting period in which tax would otherwise have become payable, or by a later day the Minister allows on its application. Who must sign is a separate question, covered in who signs the section 167 HST election.

Why the allocation still matters

Where a supply meets the tests in subsection 167(1), the Act treats each property and service as a separate supply priced at the part of the total consideration that can reasonably be attributed to it, and, where the conditions in section 167.1 are met, the part of the consideration attributable to goodwill is not included in calculating the tax payable. Both points make the allocation in the agreement worth settling with an accountant.