GST/HST on a business sale

GST/HST is one of the most common places a business sale goes sideways at closing, not because the rule is complicated in concept, but because it’s easy to overlook until the very end, when there’s no time left to fix a mistake. The default rule is straightforward to state: a sale of business assets is generally a taxable supply, the same as selling any other property, unless a specific relieving election applies and is properly filed. What trips people up is everything around that default rule — when the election is available, how it has to be filed, and what happens if nobody deals with it in time.

The default rule on an asset sale

When a corporation sells its business assets, that sale is generally treated as a taxable supply for GST/HST purposes, the same as any other sale of taxable property, meaning tax is generally payable on the transaction unless a specific exception or election applies. Different assets can carry different treatment — real property has its own rules, as does inventory — which is why a purchase agreement needs to allocate the price across categories of assets rather than treating the whole transaction as one undifferentiated number for tax purposes.

The going-concern election, at a mechanism level

Federal GST/HST law contains a mechanism, often referred to informally as the section 167 election after its place in the Excise Tax Act, that lets a buyer and seller jointly elect to treat a qualifying sale of a business, or part of one, as though no tax were payable on the supply, commonly used where substantially all of the assets needed to carry on the business are being sold as a going concern. The election has specific conditions that both parties need to meet, has to be filed correctly and within the required timeframe, and is a joint decision — both buyer and seller need to actually agree to make it, since both are certifying facts about the transaction.

Why the election is easy to miss

Because the default rule applies automatically and the election has to be actively claimed, a deal where nobody raises the GST/HST question until the closing table can end up with tax payable that a properly structured deal would have avoided, or, just as commonly, with confusion over who was supposed to remit what to whom. Raising the question early, as part of structuring the deal rather than as a closing-day afterthought, is the single biggest thing that prevents this from becoming a last-minute scramble. This is especially true in deals where the parties are focused entirely on price and closing date, and treat tax mechanics as something the lawyers will simply handle in the background rather than a structural decision the business terms need to be built around.

How a share sale is treated differently

A share sale is generally treated differently for sales tax purposes than an asset sale, because the buyer is purchasing shares, a financial instrument, rather than purchasing the underlying taxable property of the business directly. This is one more reason, beyond the income tax differences already at play, that asset and share structures aren’t simply two paths to the same tax outcome; the sales tax treatment diverges too, and needs its own confirmation for the specific deal at hand rather than an assumption carried over from a different transaction.

What actually needs to happen before closing

• Confirm early, not at closing, whether the deal qualifies for the going-concern election and whether both parties are prepared to make it.
• Allocate the purchase price across categories of assets in the purchase agreement, since different categories can carry different sales tax treatment.
• Confirm who is responsible for remitting any tax that is payable, and build that into the closing funds flow rather than discovering a gap on closing day.
• Get written confirmation from an accountant, before signing, of how the specific deal’s structure is expected to be treated.

The cost of getting it wrong

A business sale that closes without properly addressing GST/HST can leave one party unexpectedly on the hook for a tax bill they thought was covered by the election, or create a dispute over who was supposed to remit it. Fixing this after closing is far harder and more expensive than addressing it during structuring, which is why this question belongs on the very first list of items a seller’s and buyer’s advisors work through, not the last. Building it into the very first draft of the purchase agreement, rather than adding it as a late amendment once someone finally asks about it, is the simplest way to avoid the problem entirely.