The purchase agreement priced the discount on the receivables. Nobody's closing checklist priced the filing that would have made it deductible.
Short answer
Section 22 of the Income Tax Act is a joint election that lets the seller in an asset sale deduct the discount between a receivable’s face value and what the buyer actually paid for it as a business expense, while requiring the buyer to include that same discount in its own income. It only applies where the vendor and purchaser file it jointly, in prescribed form — and it does nothing on its own if nobody files it, no matter how clearly the discount was negotiated and disclosed in the purchase agreement.
Section 22(1) provides: “Where a person who has been carrying on a business has, in a taxation year, sold all or substantially all the property used in carrying on the business, including the debts that have been or will be included in computing the person’s income for that year or a previous year and that are still outstanding...to a purchaser who proposes to continue the business which the vendor has been carrying on, if the vendor and the purchaser have executed jointly an election in prescribed form to have this section apply” — then “(a) there may be deducted in computing the vendor’s income for the taxation year an amount equal to the difference between the face value of the debts so sold...and the consideration paid by the purchaser to the vendor for the debts so sold; (b) an amount equal to the difference described in paragraph 22(1)(a) shall be included in computing the purchaser’s income for the taxation year.”
Without the election, the vendor’s shortfall becomes a capital loss it likely cannot use, and the purchaser gets no deduction at all when specific receivables it acquired eventually go bad. Pricing the discount into the purchase agreement’s own schedule is not the same thing as converting it into the tax treatment the Act actually offers for it — and the election is only available on an asset sale in the first place; a share sale has no debts of the vendor’s to sell.
See it decided in the section-22-election case file, the share-deal-has-no-s.22-election file and the allowance-for-doubtful-accounts file.
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