The GST/HST Section 167 Election is a clause that can be used in an asset purchase agreement to address the tax implications of purchasing a business. It grants the parties the ability to make a joint election for an exemption from the Goods and Services Tax/Harmonized Sales Tax (GST/HST) on the purchase of all or substantially all of a company’s assets, provided that certain conditions are satisfied. Because it exempts the purchaser from having to pay GST/HST on the transaction, this clause can be very helpful in lightening the tax burden on the purchaser.
If the GST/HST Section 167 Election is not filed in the correct manner, however, it has the potential to generate liability for both the vendor and the purchaser. This is an important factor to keep in mind. Canada Revenue Agency (CRA) will conduct thorough audits to determine whether or not the election is available. If it is discovered that the election is not applicable, the vendor will be subject to an assessment for failing to collect GST/HST, and they may also be subject to interest and penalties. As a result of this, it is essential for the buyer to conduct further due diligence in order to verify that the election is available, and it is essential for the seller to incorporate an indemnification clause into the asset purchase agreement.
The following requirements need to be satisfied in order to be eligible to make the GST/HST Section 167 Election:
(i) The purchaser needs to be a GST/HST registrant if the vendor is a GST/HST registrant;
(ii) The vendor must be supplying a business or part of a business;
(iii) The vendor must have established, carried on, or acquired the business or part of a business;
(iv) The purchaser must be acquiring all or substantially all of the property that is reasonably necessary for them to carry on the business or part of a business; and
(v) The vendor and purchaser must file a joint election in the prescribed form.
It is important to note that the definition of “part of a business” is pivotal in situations in which the buyer is obtaining assets from a number of different sellers or businesses. In this scenario, it is essential to give careful consideration to the question of whether or not the assets that are going to be acquired constitute a “functionally and physically discrete operating unit” or whether or not they are “organized as a separate activity that is capable of operating on its own.”
Within the context of the GST/HST Section 167 Election, the expression “all or substantially all” refers to the percentage of a company’s assets that are being acquired through the transaction. This often refers to 90% or more of the company, but in certain circumstances, the courts have decided that a lesser threshold of 80% to 85% is adequate. It is worth stating that this threshold of 90% does not cover assets that are not required for the operation of the firm, such as accounts receivable.
If, on the other hand, the buyer is only getting a minority stake in the company (less than 90%), it is probably a good idea for them to take additional steps, such as getting a legal opinion, to make sure that all of the conditions of the Section 167 Election are satisfied. For instance, if the buyer is just purchasing the inventory, machinery, and production equipment as well as the goodwill, but they are leasing the actual property, the Section 167 Election is likely to be an option for them. On the other hand, if the buyer is solely interested in the inventory or the machinery, then the transaction does not comprise “all or substantially all” of the business.
The Canada Revenue Agency (CRA) employs a stringent methodology when considering whether or not the property being purchased from the seller enables the purchaser to carry in the same type of work as the vendor. The CRA does not take into account the property that the buyer already possesses while making this assessment; therefore, it is possible that they will have a problem with a transaction in which the buyer receives all of the vendor’s property other than the real estate. In these types of scenarios, satisfying the “all or substantially all” requirement may require the buyer to enter into a lease agreement with the seller of the real estate in order to access the property.
Other twists to be mindful of include the nature of the underlying transaction, which may lead to GST/HST applying regardless of whether the Section 167 Election is filed. Likewise, if the Section 167 Election is used in a situation where it’s inapplicable or invalid, the vendor may be reassessed for failing to collect the applicable taxes.
In conclusion, the GST/HST Section 167 Election is a useful instrument for lessening the tax burden on the purchaser in an asset purchase agreement. However, in order to avoid liability, it is essential to carefully analyze the eligibility requirements and to file the election in the correct manner. When navigating the complexity of GST/HST in an acquisition of a business, it is always a good idea to seek the guidance of a tax professional as well as a business lawyer.
