What is a section 22 election for accounts receivable in a business sale?

When receivables are sold with a business for less than their face value, there is a gap between the two. Section 22 of the Income Tax Act deals with the tax result of that gap, and it applies only if the seller and the buyer sign an election together. The GST/HST election on a business sale, filed on Form GST44, is a different election under a different Act.

When it can be used

The section applies where a person who has been carrying on a business sells, in a taxation year, all or substantially all the property used in carrying it on, including outstanding debts that have been or will be included in income, to a purchaser who proposes to continue the business. The vendor and purchaser must jointly execute an election in prescribed form. A sale of the receivables alone does not fit that description.

What it does for the seller

The seller may deduct, in computing income for the year, the difference between the face value of the debts sold and the consideration the buyer paid for them. The Act carves out debts for which the seller has already made deductions under paragraph 20(1)(p). The rules apply only if the joint election has been executed.

What it does for the buyer

The buyer includes the same difference in its income for the year. The debts are also deemed, for the purposes of paragraphs 20(1)(l) and 20(1)(p), to have been included in the buyer’s income, and the buyer cannot claim a deduction under paragraph 20(1)(p) for a debt on which the seller has already claimed one. Because the effects mirror each other, both accountants need to work from the same figures.

The agreed figure binds both sides

The election must contain a joint statement of the consideration paid for the debts, and the Act makes that statement binding on the vendor and the purchaser as against the Minister, subject to subsection 69(1). The CRA notes that in some cases a sales agreement sets out a price for each asset. A share purchase works differently, as the section 22 election and share purchases explains.