Sale of Business HST Calculator
An asset sale carries HST on almost everything unless a valid section 167 election is made. Work out the HST payable on closing, the cash a joint GST44 election saves, and what happens to the real property that the election cannot cover.
saved by the election
—
—
—
—
Asset by Asset
| Asset Class | Allocated Price | HST Treatment | Without the Election | With the Election |
|---|
Election Eligibility Test
| Condition | What Section 167 Requires | Your Deal |
|---|
Exposure If the Election Is Later Denied
| Item | Basis | Amount |
|---|
Points That Decide This
What to Do Next
—
Disclaimer: HST is applied at the Ontario rate of 13%. Section 167 of the Excise Tax Act allows a vendor supplying a business, or a part of a business, that was established or carried on by the vendor to jointly elect with the purchaser so that no tax applies to the supply, provided the purchaser acquires ownership, possession or use of all or substantially all of the property that can reasonably be regarded as necessary to carry on the business. Both parties must be registrants for the full election. The election does not apply to a taxable supply of real property made to a purchaser who is a registrant, to a taxable supply of a service rendered by the vendor, or to a taxable supply of property by way of lease. Where real property is supplied to a registrant purchaser, subsection 221(2) relieves the vendor from collecting and the purchaser self-assesses on its return. Section 167.1 separately relieves the goodwill portion where the consideration is allocated to goodwill in writing and substantially all the property necessary to carry on the business is acquired. Form GST44 is filed by the purchaser with the return for the reporting period in which the acquisition is made. Shares are a financial instrument and their supply is exempt. Interest is modelled at the prescribed arrears rate of 8% compounded daily. This page is general information, not tax advice.
Without the Election, HST Applies to Almost the Whole Price
In an asset sale the vendor is making a series of taxable supplies. Equipment, inventory, a non-compete and goodwill are all taxable in the ordinary course, and on a million dollar deal that is a large number to fund on the closing date.
| A $1,000,000 Asset Sale | Allocated | HST at 13% |
|---|---|---|
| Goodwill | $600,000 | $78,000 |
| Equipment and fixtures | $250,000 | $32,500 |
| Inventory | $120,000 | $15,600 |
| Restrictive covenant | $30,000 | $3,900 |
| Total HST on closing | $1,000,000 | $130,000 |
The purchaser normally recovers that $130,000 as an input tax credit, so the real problem is cash and timing rather than absolute cost. The money still has to be found on the closing date and it comes back one filing period later. On a leveraged purchase that gap is often the reason a deal needs a larger facility than it should.
What the Election Actually Requires
Section 167 is not a form you attach to save tax. It is a set of conditions, and the form only records that the conditions were met.
- The vendor must be supplying a business, or a part of a business, that the vendor established or carried on. Selling a collection of assets is not the same thing.
- The purchaser must acquire all or substantially all of the property reasonably regarded as necessary to carry the business on. The CRA reads substantially all as ninety percent.
- Both parties must be registrants for the full relief to apply.
- The election must be joint, made on Form GST44, and filed by the purchaser.
A purchaser who takes the customer list, the equipment and the goodwill but leaves behind the premises lease that the business cannot operate without has not acquired substantially all the property necessary to carry it on. That is the most common way a section 167 election fails, and it fails years later when the CRA looks at it, by which time the vendor has distributed the proceeds.
Real Property Is Always Outside the Election
The election does not apply to a taxable supply of real property made to a purchaser who is a registrant. That sounds like bad news and is usually not, because subsection 221(2) already relieves the vendor from collecting on real property sold to a registrant. The purchaser self-assesses on its own return and claims the offsetting input tax credit in the same return.
| Purchaser’s Position | Who Handles the Tax on Real Property | Net Cash Cost |
|---|---|---|
| Registrant, fully commercial use | Self-assesses and claims the credit in the same return | Nil |
| Registrant, partly exempt use | Self-assesses, credit restricted to the commercial portion | The exempt portion |
| Not a registrant | Vendor must collect on closing | The full 13% |
Goodwill Has Its Own Relief
Section 167.1 relieves the goodwill portion of the price independently of the section 167 election, provided the consideration is allocated to goodwill in the written agreement and the purchaser acquires substantially all the property necessary to carry on the business. On most deals goodwill is the largest single line, so this relief matters even where the wider election is unavailable.
It also means the allocation clause in the purchase agreement is a tax provision, not a schedule to be filled in at the last minute. An agreement that states a single price with no allocation gives away the goodwill relief for nothing.
The Filing Deadline Is the Purchaser’s, Not the Vendor’s
Form GST44 is filed by the purchaser with the GST/HST return for the reporting period in which the acquisition is made. The vendor signs it and then has no control over whether it is filed.
| Purchaser’s Filing Frequency | Return Covering the Closing | GST44 Deadline |
|---|---|---|
| Monthly | The month of closing | One month after that month end |
| Quarterly | The quarter of closing | One month after that quarter end |
| Annual | The fiscal year of closing | Three months after that year end |
If the election is later found invalid, the assessment lands on the vendor. The vendor was the person required to collect and remit, and the purchaser is usually long gone or arguing about it. That is why the vendor should hold back an amount equal to the HST, or take an indemnity with real substance behind it, until the GST44 has actually been filed.
A Share Sale Sidesteps All of This
Shares are a financial instrument and their supply is exempt, so there is no HST on a share sale and no election to make. That is not a reason to choose a share sale, since the income tax consequences run in the opposite direction, but it removes this entire question from the closing.
The HST analysis should never decide asset sale against share sale. The lifetime capital gains exemption, the purchaser’s cost base in the assets, and the liabilities that come with the shares are all worth far more than the timing cost of the tax. Please settle the structure first and then handle the HST inside it.
What This Calculator Does Not Cover
- The income tax allocation, which drives recapture, capital gains and the purchaser’s future deductions
- Provincial land transfer tax on any real property in the deal
- Assets outside Ontario, where a different rate applies
- Supplies of services rendered by the vendor, which the election never covers
- Property transferred by way of lease, which the election never covers
- The section 22 election on accounts receivable, which is an income tax matter
The allocation clause and the election belong in the agreement, not in a conversation after signing. Our tax planning service covers the allocation, the GST44, the holdback wording and the filing itself.
Frequently Asked Questions
Common questions on HST when a business changes hands.
Related Calculators and Guides
More tools for owners selling or restructuring.
Get the Election Right Before the Agreement Is Signed
Send us the draft purchase agreement and the allocation schedule. We will test the section 167 conditions, set the goodwill wording, prepare the GST44 and put a holdback in place so the tax is not assessed against you two years later.