IT-188R Archived "Sale of Accounts Receivable" 22 May 1984

1. Section 22 is applicable upon election by a vendor and a purchaser, where the vendor (individual, partnership, corporation or estate) sells all or substantially all of the assets of a business that was carried on in Canada to the purchaser who proposes to continue the business. All or substantially all is considered to be at least 90% of the property used in carrying on the business. The business assets sold must include all the accounts receivable of the vendor that are outstanding at the time of the sale. "Accounts receivable" includes the debts arising from loans made in the ordinary course of the business if part of the business was the lending of money.

"The use of the 'rollover' provisions of section 85 precludes the use of the section 22 election ... ."

An election under s. 22 is not available where debts are distributed to the parent on a winding-up under s. 88 because a sale does not take place.

Sale or purchase of trade receivables as part of business on capital account

7. If the sale of accounts receivable by taxpayers on the accrual basis does not meet the requirements under section 22 as outlined above, or if the vendor and the purchaser do not file an election, any loss on sale will be a capital loss to the vendor, unless the vendor is a trader in accounts receivable. Such a loss is treated in accordance with the provisions of the Act governing capital losses. However, the vendor does have the right to establish that, as of the date of the sale, certain of the accounts receivable were bad debts which met the requirements of paragraph 20(1)(p) and were therefore deductible as an expense of the year. The purchaser cannot claim deductions under paragraph 20(1)(l) or (p) for the accounts purchased, and any gain or loss on realization of the accounts is a capital gain or loss unless the purchaser is a trader in accounts receivable.

Factoring trade receivables and notes receivable on income account

8. Where in the ordinary course of business a taxpayer discounts customer's trade paper such as notes and bills receivable, the amount of the discount is considered to be a deductible business expense, not a capital loss.