In my previous blog “Selling assets from seller’s perspective”, I touched on the HST/GST implication on selling assets. Here is the link. Today, I will expand this topic as I came across similar issues with clients quite a few times already.
Generally, if a business is involved in a share sale, then there should not any HST (we assume in Ontario only) implication at all. However, issues arise when it is structured as an asset sale of a business. Assets like receivable, capital assets will be subject to HST because they are used in a commercial activity is deemed to be a taxable supply when sold or leased. However, if both of buyer and seller meet certain conditions and apply a section 167. Such HST burden can be avoided.
Those conditions are as follows:
- Both the seller and purchaser are a registrant;
- The seller is supplying a business or part of a business;
- The seller established, carried on, or acquired the business or part of a business;
- Under an agreement, the purchaser is acquiring all or substantially all of the property that is reasonably necessary for the purchaser to carry on the business or part of a business; and
- A joint election is made by the seller and purchaser.
However, there are also three exceptions:
- If a taxable supply of a service that is to be rendered by the seller, HST still needs to be charged;
Similarly, if a taxable supply of property by way of lease, licence or similar arrangement, HST needs to be charged; - A taxable sale of real property where the recipient is not a registrant, HST applies as well.Here is an example by the CRA:
Pulp & Paper Co. is a registrant. It is primarily engaged in operating a pulp and paper mill in Anycity, Canada. Pulp & Paper Co. also has a printing division that has a separate location from the mill. Pulp & Paper Co.’s printing division is organized to operate independently from the mill (e.g., it has its own employees, its own customers and its own printing equipment). Printers Co., also a registrant, reaches an agreement with Pulp & Paper Co. to acquire the printing operations. The agreement provides among other things that Printers Co. will acquire ownership of the following property related to Pulp & Paper Co.’s printing division: inventory, machinery, production equipment, and goodwill. Pulp & Paper Co. will lease the real property to Printers Co.Printers Co. and Pulp & Paper Co. are entitled to make the election under subsection 167(1). The supply to Printers Co. of the various elements related to Pulp & Paper Co.’s printing division constitutes a sale of part of a business. The package of assets acquired by Printers Co. under the agreement with Pulp & Paper Co. represents a supply of all or substantially all of the property required by Printers Co. to carry on the printing operation as a business. No GST/HST is payable on the transfer of ownership of these assets if the parties file the joint election under subsection 167(1). However, the lease of the real property is a taxable supply and subject to GST/HST.
HST issues sometimes are too remote for business owners as it is only discovered by the CRA when it starts to perform audits.
In some other complicated cases, related group of companies are involved in certain transactions that “transfer” the assets from one to the other, even though, there is no gain on the books assuming they are “transferred” at net book value/tax cost. However, there may a HST implication.
Let’s look at another case from the CRA:
TrucksCo and CarryingCo are residents and registrants for HST purposes. CarryingCo, a long-distance carrier, operates a transportation business in south-western Ontario. CarryingCo needs to expand its truck fleet. It acquires a tractor-trailer from TrucksCo that is also engaged in the transportation business. The tractor-trailer is the only property supplied under the agreement.
The supply of the tractor-trailer made by TrucksCo to CarryingCo does not constitute a sale of a business or part of a business for the purpose of subsection 167(1). It is only a sale of a particular asset used in TrucksCo’s business. TrucksCo and CarryingCo are not entitled to make the election under subsection 167(1). Therefore, the supply of the tractor-trailer will be subject to HST.
From the case above, TrucksCo and CarryingCo are involved in the taxable goods and/or services. As a result, HST is payable on the actual selling price.
However, under the Excise Tax Act, Section 156 allows certain corporations to treat supplies between them as if they were made for nil consideration. This election helps to avoid cash flow issues arising from intra-group supplies if the transactions are between ‘closely related corporations and Canadian partnerships’. Sounds good, doesn’t it? But, when you are very carefully reading the definition of ‘closely related corporations and Canadian partnerships’, you may be surprised. For example, closely related corporations means there must be a degree of common ownership of at least 90% between the electing corporations. Some business owners assume related companies are closely related corporations under the Excise Tax Act, and the worst thing is that the HST issues are often being overlooked.
Remind you, there are a number of forms required to be filed with the CRA and the filing timing is critical. Speak to your accountant and make sure those HST issues are properly addressed.
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