Is GST/HST charged on accounts receivable sold with a business?

Accounts receivable are the amounts customers still owe the seller. When a business is sold, the buyer may take over the right to collect them. Whether GST/HST applies to that transfer is a different question from whether it applied to the original invoices, and from whether the Income Tax Act’s section 22 election is needed. This page reads the federal Excise Tax Act, which also covers the HST. Provincial taxes outside that Act are not covered.

How the Act classifies a receivable

The Act defines a debt security as a right to be paid money. A financial instrument includes a debt security, and the definition of financial service includes the transfer of ownership of a financial instrument. On that wording, an amount a customer owes looks like a debt security, and selling it looks like a transfer of ownership of one. Whether a particular receivable fits depends on its terms, so the accountant should look at what is actually being sold.

Why that points to an exempt supply

The Act says an exempt supply is a supply included in Schedule V, and Part VII of Schedule V includes a supply of a financial service that is not included in Part IX of Schedule VI. A zero-rated supply is one included in Schedule VI; ask the accountant whether anything in Part IX of Schedule VI applies to this sale. The Act imposes GST/HST on the recipient of a taxable supply, meaning a supply made in the course of a commercial activity, and a person’s commercial activity leaves out a business to the extent it involves making exempt supplies. So on this reading no GST/HST is charged on the transfer of the receivables themselves. The definition of financial service also lists exclusions, such as debt collection services and professional services of an accountant, actuary, lawyer or notary, so confirm any unusual arrangement before relying on this.

The tax on the original invoices is separate

Section 168(1) says tax on a taxable supply is payable by the recipient on the earlier of the day the consideration is paid and the day it becomes due, and later subsections of section 168 change that for some cases. That tax belongs to the original sale of goods or services to the customer, not to the later transfer of the receivable. The definition of financial service also leaves out the payment or receipt of money as consideration for the supply of property other than a financial instrument or of a service other than a financial service. Ask the seller’s accountant how the tax on each open invoice was reported, and whether any of it is still to be reported or remitted.

Where section 167 fits

Section 167 lets a supplier and a recipient make a joint election, in prescribed form, on the supply of a business or part of a business, if under the agreement the recipient is acquiring ownership, possession or use of all or substantially all of the property that can reasonably be regarded as necessary for the recipient to carry on the business or part. It does not allow the election where the supplier is a registrant and the recipient is not, and subsection (1.1) sets out the election’s effect where the recipient, if a registrant, files it with the Minister by the deadline that subsection sets. The CRA publishes the election as Form GST44. Where the election applies, no tax is payable on a supply of property or service made under the agreement, other than a taxable supply of a service to be rendered by the supplier, a taxable supply of property by way of lease, licence or similar arrangement and, where the recipient is not a registrant, a taxable sale of real property. Receivables are not on that list, and on the reading above they carry no GST/HST either way. How we qualify for the election covers the conditions.