An asset purchase is a taxable supply, so on paper the buyer hands the seller GST/HST on the whole price and waits months to claim it back. The Excise Tax Act lets the parties elect that away — but only where the buyer is acquiring enough of the business to actually carry it on. Here is the test, in the statute’s own words, and what disqualifies a deal.
Key takeaways
SECTION 01 OF 09
A share sale transfers a corporation. An asset sale transfers things — equipment, inventory, goodwill, contracts — and things are supplies. So the default position on an asset deal is that the buyer pays GST/HST on the purchase price, and then recovers it later through input tax credits.
On a small transaction that is an irritation. On a million-dollar asset purchase it is a serious cash-flow event at the worst possible moment, when the buyer has just emptied its accounts to close, and the recovery arrives a reporting period later. Lenders financing the purchase price do not always fund the tax on it, which is how an otherwise-funded deal develops a hole in the week before closing. This is one of the practical reasons buyers and sellers argue about structure even before tax on the gain is discussed — Treadstone Law sets out the wider structural trade-off in asset purchase versus share purchase.
SECTION 02 OF 09
The relief is in Excise Tax Act s. 167, under the marginal note Supply of assets of business. The operative condition is that the supplier supplies “a business or part of a business that was established or carried on by the supplier”, and that under the agreement “the recipient is acquiring ownership, possession or use of all or substantially all of the property that can reasonably be regarded as being necessary for the recipient to be capable of carrying on the business or part as a business”.
Read that condition closely, because it is not the test most people assume. It does not ask what percentage of the purchase price the assets represent. It asks whether the buyer is getting enough to be capable of carrying on the business.
SECTION 03 OF 09
The usual failure is a buyer who carves something out. If the seller keeps the premises lease, or the key contracts, or the software the operation actually runs on, the buyer may not be acquiring what it needs to carry the business on — and the election that everyone assumed would be available is not.
The carve-out is rarely tax-motivated, which is what makes it dangerous. It is usually commercial: the seller wants to keep a vehicle, or retain a contract with a related party, or hold back premises they own personally and lease to the buyer instead. Each of those is a reasonable commercial position, and each one moves the transaction closer to the line.
The test is also applied to what the buyer actually acquires, not to what the agreement recites. Describing the deal as a sale of the business does not make it one if the operating essentials stayed behind.
That is worth working out before the price is set, because the party who ends up funding the tax is not always the one who expected to. Treadstone Law covers the Ontario mechanics in the HST going-concern election on a business sale.
SECTION 04 OF 09
The section does not simply switch the tax off. It changes how the transaction is characterised. Where it applies, the supplier is “deemed to have made a separate supply of each property and service that is supplied under the agreement”, with the consideration apportioned across them. That deeming is the machinery that lets the relief operate asset by asset rather than as a single lump.
The practical consequence for a buyer is that the arithmetic in the schedule of assets stops being a formality. If the allocation across asset classes is careless, the deeming provision is applying to numbers nobody thought about, and those same numbers drive capital cost allowance and the seller’s recapture on the other side of the deal.
This is the usual reason a purchase price allocation gets negotiated rather than assumed. Both parties are living with the same schedule for different tax purposes, and their interests in it are not aligned.
SECTION 05 OF 09
A buyer running an asset deal is going to encounter the phrase “all or substantially all” twice: once here, and once in the receivables election under the Income Tax Act. The wording is similar and the questions are related, but they are not the same test and they are not automatically satisfied together.
The GST/HST condition asks whether the buyer is acquiring enough to be capable of carrying on the business. The receivables provision asks whether the vendor sold all or substantially all the property used in carrying on the business, and separately whether the purchaser proposes to continue it. A deal can be structured so that one is comfortably met and the other is genuinely arguable.
Testing both at the same time, early, is cheap. Discovering the mismatch during closing is not, because by then the price has been agreed on assumptions that turned out to be wrong.
SECTION 06 OF 09
Neither side can make this election unilaterally. It requires both, which means it is a term of the deal and belongs in the purchase agreement alongside the other closing obligations, not in an email on the morning of closing.
The practical failure mode is a buyer who assumes the election is automatic because their last deal had one. It is not automatic, and the conditions are specific to the transaction in front of you. Treadstone Law’s note on closing conditions in an Ontario business purchase is a reasonable place to see how obligations of this kind get papered.
SECTION 07 OF 09
This is the question the agreement should answer and usually does not. The parties elect, the deal closes, and the tax position is settled — unless it later turns out the conditions were not met, at which point tax is owing on a transaction that completed months ago and the money has been distributed.
The commercial answer is an indemnity, and the argument is about who gives it. The seller is usually better placed to know what was retained and why, since the carve-outs were theirs. The buyer is the one who claimed the input tax credits. Neither of those observations settles it, but they are the right starting positions, and the conversation is far more productive before closing than after an assessment.
A related and simpler protection is to make the allocation schedule a shared document rather than something the buyer’s accountant produces afterwards. If both sides sign the numbers, neither can later characterise them as the other side’s assumption.
SECTION 08 OF 09
Section 167(1.1) sets out what the election does, and it expressly leaves three categories outside: “(i) a taxable supply of a service that is to be rendered by the supplier, (ii) a taxable supply of property by way of lease, licence or similar arrangement, and (iii) where the recipient is not a registrant, a taxable supply by way of sale of real property”.
The second of those is the one to watch. A deal where the seller keeps the building and leases it to the buyer is an extremely common structure, and property supplied by way of lease is outside the relief. The election is not a blanket removal of tax across everything in the transaction.
There is also an availability limit in s. 167(1)(b): the joint election is open to the parties “except where the supplier is a registrant and the recipient is not a registrant”. And where the recipient is a registrant, the election has to be filed with the Minister by the day its return is due for the first reporting period in which the tax would otherwise have become payable. It is a deadline, not a formality.
The election deals with the tax on the supply. It does not deal with the tax on the gain, it does not change who owns what, and it does not affect whether the deal was a good one.
It is worth being precise about that because the relief is sometimes described loosely as making a business sale “tax free”, which is not what it does and not what the section says. The gain is taxed on its own terms, and in an asset sale it is taxed less favourably for the seller than in a share sale — which is the far larger number and the reason structure gets argued about in the first place.
SECTION 09 OF 09
Ask one question early: is the buyer acquiring everything it needs to run this business from day one? If the honest answer is no, do not assume the election, and price the tax.
If the answer is yes, get the election into the agreement as a mutual covenant with the closing deliverables, so neither side can quietly decline it later when the tax position has changed in their favour.
Sources
