Anonymised, illustrative composite. An asset purchase of a wholesale distributor carried the accounts receivable across at a negotiated discount to face value. The purchase agreement priced that discount. Nobody's closing checklist priced the one filing that would have made it deductible for either side.
At a glance
A buyer acquired the assets of a wholesale distributor, including its accounts receivable, as part of a sale of substantially the whole business. Diligence had flagged the usual collection risk in the receivables ledger — a handful of slow-paying accounts, one customer in genuine financial difficulty — and the parties negotiated a straightforward discount to face value to reflect it. The purchase agreement's working-capital schedule disclosed the discount in plain figures. Everyone involved understood exactly what was being priced.
What nobody's closing checklist generated was the joint election s.22 of the Income Tax Act specifically provides for this exact situation. Unlike most of what happens on a closing date, this election is not signed at the closing table — it has to be filed with a return, which made it easy to lose track of once the deal team's attention moved to integration. It was only during post-closing tax preparation, months later, that the buyer's accountant noticed nothing had ever been filed.
Face value of the receivables transferred: $940,000. Consideration allocated to them in the purchase agreement: $845,000. The $95,000 gap is exactly the kind of shortfall s.22 exists to handle — and, without the election, exactly the kind of shortfall that falls between two stools instead.
s.22(1) applies where a vendor “has 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” to a purchaser who continues the business — the threshold this deal cleared, since the sale covered substantially the entire operation, not a piecemeal transfer of receivables on their own. Where that threshold is met and “the vendor and the purchaser have executed jointly an election in prescribed form to have this section apply,” two things follow: “(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.” The vendor gets a $95,000 deduction; the purchaser picks up $95,000 of income — but the purchaser also gets the receivables treated, for bad-debt purposes, as though they had always been part of its own income, so that when specific accounts actually go bad, the ordinary bad-debt deduction rules are available to it.
s.22(2) is what makes this happen procedurally: “An election executed for the purposes of subsection 22(1) shall contain a statement by the vendor and the purchaser jointly as to the consideration paid for the debts sold by the vendor to the purchaser and that statement shall...be binding on the vendor and the purchaser.” The figure the agreement had already disclosed — $845,000 against $940,000 of face value — is exactly the statement the prescribed form requires. Nothing about this deal was hidden or disputed. The only thing missing was the form itself.
Without it, the vendor's $95,000 shortfall is not a business deduction under s.22(1)(a) at all — it falls to be treated as an ordinary capital loss on the disposition of the receivables, deductible only against capital gains the vendor may or may not have, in a corporation that had just sold its business and had little else generating them. And the purchaser gets nothing: without the election, the receivables were never deemed included in the purchaser's income the way s.22(1)(c) requires for a bad-debt deduction to be available later, so when a specific account it acquired eventually proves uncollectible, there is no deduction to claim for it either. Both sides lose the tax result the Act had already built for exactly this transaction. Only the government benefits from the form not being filed.
Counsel investigated whether a late-filed election might still be accepted. The Act itself does not resolve that question cleanly on these facts, and neither side wanted to spend more resolving the uncertainty than the $95,000 at stake justified. Rather than litigate or gamble on a late filing, the parties agreed a straightforward commercial side payment, splitting the value of the lost deduction between them, and closed the file.
The buyer's firm rewrote its standard asset-deal closing checklist afterward to include the s.22 election as a post-closing tax-filing item with its own deadline — not a signing-table document, and easy to lose precisely because it is not one.
Had the discount been larger — a distressed receivables book rather than a modest $95,000 adjustment — the same gap would have been proportionately larger on both sides: a vendor capital loss it likely could not use, sitting alongside a purchaser with no bad-debt deduction on receivables it paid real money to acquire. The election costs nothing to file and changes nothing about what either side actually pays for the receivables. It only changes whether the shortfall is deductible at all.
The tell was procedural rather than commercial: everything about the $95,000 discount had been disclosed, negotiated and priced in the agreement itself. The gap sat entirely in what happens after signing — a prescribed-form election that has to be filed with a return, on a schedule nobody had built into the deal timeline, for a document that never needed to be signed at the closing table in the first place.
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