The closing checklist carried the same line item as the firm's last asset deal: file the section 22 election on the receivables discount. On a share purchase there is no vendor and no purchaser of the debts for the section to apply to.
At a glance
A buyer acquired the shares of an Ontario commercial printing company for $6,100,000. Diligence on the receivables ledger turned up the ordinary picture: a handful of slow accounts and one customer in genuine difficulty, against a face value of $680,000. The parties negotiated a $52,000 reduction to reflect the expected shortfall, built into the working-capital target the same way the discount is built into the price in this file's asset-deal sibling case. The buyer's counsel, working from the firm's standard asset-deal closing checklist, flagged the section 22 election as an outstanding item to file after closing.
Nobody had asked whether anything had actually been sold. In a share purchase the target corporation keeps every asset on its own balance sheet, unchanged — the receivables included. What changes hands is the shares of the corporation, held by its shareholders, to the buyer. The corporation itself is not a party to that sale and disposes of nothing.
ITA s.22(1) is triggered by a specific event, and that event did not happen here. It applies where a taxpayer “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 person…who carries on the business…and…the vendor and the purchaser have executed jointly an election in prescribed form to have this section apply.” Every noun in that sentence is doing work: a vendor, who has sold the business's property, to a purchaser, who continues the business. On a share sale there is no vendor of the business's property at all — the corporation continues to own everything it owned the day before closing, receivables included, and continues to carry on precisely the business it was carrying on. The people who sold something are the selling shareholders, and what they sold was shares, not “property used in carrying on the business.” Section 22 has no vendor-of-the-receivables and no purchaser-of-the-receivables to attach the election to, so there is nothing to elect into: not a s.22(1)(a) deduction for anyone, and not a s.22(1)(b) income inclusion for anyone.
That does not mean the $52,000 vanishes from the transaction — it means the shortfall shows up somewhere else entirely. The corporation still owns the receivables and will collect or write them off in the ordinary course of its own business, on its own income account, under whatever ordinary bad-debt rules apply to it as the continuing owner — a different provision from section 22, not sourced or quoted in this file. What the $52,000 discount actually is, on a share deal, is a straightforward reduction to what the buyer paid the selling shareholders for their shares, run through the purchase agreement's own working-capital mechanism rather than through any provision of the Income Tax Act. Its tax character sits entirely with the selling shareholders' proceeds of disposition of the shares — a capital gains question for them, not an income question for the corporation or the buyer.
Face value of the receivables the corporation continued to hold: $680,000. Working-capital adjustment negotiated to reflect the expected shortfall: $52,000, reducing what the buyer paid for the shares from the agreed enterprise value to the actual closing consideration. No amount was deducted by anyone under s.22(1)(a); no amount was included in anyone's income under s.22(1)(b). The $52,000 simply reduced the share purchase price, the same commercial outcome the asset-deal sibling case reaches through the election — reached here through the price itself.
The section 22 line item was struck from the closing checklist once the structure was checked against the section's own wording. The $52,000 stayed inside the working-capital adjustment, and the purchase agreement added a specific representation on the collectability of the receivables the corporation was retaining, allocating the risk commercially rather than through any statutory election.
Filing a section 22 election naming a vendor and purchaser of receivables that were never sold would not have created the deduction-and-inclusion pair the section is built for — there is no disposition for the election to attach to, so a filed election risks being treated as a nullity rather than as authority for any return position built on it. The real cost of the mistake is not a missed deduction; it is the risk of a return prepared as though section 22 had done work it structurally cannot do on a share sale, leaving whatever position depended on it unsupported.
The tell was the checklist's own origin: a template built for an asset deal, applied without checking whether its first premise — a sale of the business's property — was even true on these facts. On a share purchase it never is.
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