When you are purchasing a business in a share deal, the GST/HST implications can be fairly straight forward, in that the purchase of shares of a corporation are generally not subject to GST/HST. The complexities arise when you structure your acquisition as an asset purchase.
For GST/HST purposes, under section 167 of the Excise Tax Act, if you buy a business or part of a business, and acquire the use of or possession of all or substantially all of the property that can reasonably be regarded as necessary to carry on the business, you and the vendor may be able to jointly elect to have no GST/HST payable on the sale by completing Form GST44, Election Concerning the Acquisition of a Business or Part of a Business. For the election to apply to the sale, you have to be able to continue to operate the business with the property acquired under the sale agreement.
In GST Memorandum 14-4 Sale of a Business or Part of a Business, it states:
In general, a “part of a business” is an activity that may be a functionally and physically discrete operating unit, or it may be an activity that supports or is related to the broader business, but is organized as a separate activity that is capable of operating on its own.
Where issues have arisen is when the purchaser is acquiring all of the assets but not purchasing the real estate or entering into a lease for the existing premises. It is a question of fact if the CRA will constitute this as obtaining ‘all or substantially all’ of the property necessary to carry on the business. The CRA’s memorandum goes on to state:
The value of any property that is not acquired under the agreement for the supply, but that the recipient requires to carry on the business must generally be not more than 10% of the fair market value of all the property necessary to carry on the business. The recipient must be capable of carrying on the same kind of business that was established or carried on, or acquired, by the supplier, with the property that the recipient has acquired under the agreement.
You cannot use this election if the vendor is a registrant and the buyer is not a registrant for GST and HST purposes. If the transfer is a non-registrant to a non-registrant, the election form need not be filed with the CRA, but must still be completed and kept on file by the vendor and the purchaser. The election form must be filed with the CRA by the purchaser, no later than the due date of the purchaser’s GST/HST return for the reporting period in which you would have otherwise had to pay GST/HST on the purchase.
Even when you use the election, GST/HST will still apply to:
- a taxable supply of a service made by the seller;
- a taxable supply of property made by way of lease, licence, or similar arrangement; and
- where the buyer is not a registrant, a taxable sale of real property.
Often in acquisitions, the GST/HST considerations are not front and centre. The CRA is starting to perform audits on the validity of filing for the election, so it is vital that GST/HST is considered along with all other business and income tax considerations. DJB can help to ensure you structure your deal to help maximize your company’s cash flow and minimize your GST/HST burden.
Article written by: Greg Sawatsky, MAcc, CPA, CA