An estate's transfer of a deceased owner's business assets, and the wrong election form

The situation

A marina and boat-repair operator ran his business as a sole proprietor for over thirty years. He died suddenly, and under his will the business assets — the workshop equipment, a small fleet of rental boats, and parts inventory, together valued at roughly $310,000 — passed to his son, who had worked alongside him for a decade and already ran a small boat-detailing business of his own, registered for GST/HST.

The son continued operating the marina without a break in service. From the customers' perspective nothing changed; from a tax perspective, the estate had to formally transfer legal ownership of the business assets to him as beneficiary before the year-end.

The problem

The estate's bookkeeper, familiar with how a going-concern business sale is normally handled, began preparing the standard joint election that lets a business change hands without GST/HST changing hands — the one used on an ordinary purchase and sale between unrelated parties. That election is built around an agreement for the supply of a business, between a supplier and a recipient, where the recipient is acquiring all or substantially all of the property necessary to carry on the business.

There was no agreement for a supply here, and no purchaser. The son was not buying anything; he was receiving the assets as a beneficiary under his father's will, through the estate administering the succession of the father's property on death. That is a different legal event, and the standard election does not fit it.

The numbers

Value of the business assets transferred from the estate to the son: approximately $310,000, comprising workshop equipment, rental boats and parts inventory.

At Ontario's 13% HST rate, tax on a transfer of that value, had no relief applied, would have been roughly $40,000 — payable by the estate on assets it was distributing under a will, not selling for consideration, with no purchase price against which to fund the tax.

The rule that decided it

ETA s.167(1), marginal note “Supply of assets of business”, is built for “a supply of a business or part of a business” where, “under the agreement for the supply, the recipient is acquiring ownership, possession or use of all or substantially all of the property… necessary… to be capable of carrying on the business”. It requires an agreement, a supplier, and a recipient acquiring under that agreement.

s.167(2), marginal note “Supply of business assets of deceased”, is a separate provision built for exactly this situation: where “(a) immediately before death, an individual held property for consumption, use or supply in the course of a business carried on immediately before the individual's death, (b) the estate of the deceased individual makes a supply, in accordance with the individual's will or the laws relating to the succession of property on death, of the property to another individual who is a beneficiary of the estate and a registrant, (c) the property is received for consumption, use or supply in the course of commercial activities of the other individual, and (d) the estate and the other individual jointly elect under this subsection, no tax is payable in respect of the supply”.

Read the unit. s.167(2) still requires a joint election — the estate and the beneficiary both sign, exactly as a supplier and recipient would under s.167(1) — but it does not ask whether the beneficiary is acquiring “all or substantially all” of anything, and it does not need an agreement for a supply at all, because a testamentary transfer under a will is not a sale. It asks instead whether the deceased held the property for use in a business immediately before death, whether the recipient is a beneficiary receiving it under the will or intestacy rules, and whether that beneficiary is a registrant who will use the property commercially.

Every one of those conditions was met here: the father held the assets for use in the marina business immediately before his death; the son received them as a named beneficiary under the will, not by purchase; and the son was already a registrant who would continue using the assets commercially. The estate and the son signed the joint election under s.167(2), and no tax applied to the transfer.

The outcome

The estate's advisor caught the mismatch before the wrong election was filed, once it became clear there was no purchase agreement for the s.167(1) form to attach to. The correct election under s.167(2) was signed by the estate's executor and the son and filed with the return covering the reporting period in which the transfer occurred. No tax was payable on the transfer, and the marina continued operating under the son's ownership without interruption.

What it would have cost otherwise

Had the estate simply distributed the assets to the son without any election on the theory that “it's a family transfer, there's no sale, so there's no tax”, that assumption would have been wrong on its own terms: a supply from an estate to a beneficiary is still a supply for GST/HST purposes, and without the s.167(2) election in place, tax would have applied on the roughly $310,000 in property values — an unfunded liability landing on an estate that had no sale proceeds to pay it from, only assets it was distributing in kind.

The tell

The tell was procedural, not substantive: the advisor reached for the familiar form before checking whether its own conditions — an agreement, a supplier, a recipient acquiring under that agreement — actually described what was happening. A testamentary transfer under a will was never going to fit a provision written around a purchase and sale, no matter how similar the end result looked.

Takeaways

• • ETA s.167(2) is a separate election from the ordinary going-concern election in s.167(1), built specifically for a deceased's business assets passing to a beneficiary under a will or the intestacy rules.
• • s.167(2) still requires a joint election, signed by the estate and the beneficiary — the input claim that no election is needed for a deceased's estate is wrong; the difference is in the conditions, not in whether an election exists.
• • s.167(2) drops the “all or substantially all” property test that governs s.167(1) — it asks only whether the deceased used the property in a business, the recipient is a beneficiary, and the beneficiary is a registrant using it commercially.
• • A testamentary transfer is not a sale under an agreement, so the standard going-concern election form does not fit it even where the underlying facts otherwise look like an ordinary business succession.
• • Confirm the recipient's registrant status before relying on s.167(2) — the beneficiary must be a registrant for the election to be available at all.

Sources

• • Excise Tax Act — s.167(1), the ordinary going-concern supply-of-a-business election; s.167(1.1), its effect; s.167(2), “Supply of business assets of deceased”, the provision applied here.
• • Treadstone Law — selling a business as a going concern in Ontario: the HST election explained — explains the ordinary s.167(1) election in depth. It does not address the deceased's-estate variant in s.167(2); that is the provision this file turns on.