1 May 1996 GST/HST Interpretation 11735-15 - Subsection 167(1) & (1.1)

Dear XXXXX

We are writing in reply to your letter of April 19, 1996 wherein you request a GST interpretation concerning the application of subsections 167(1) and (1.1) of the Excise Tax Act (the "Act").

As you noted in your letter, the Department's position with respect to the availability of the section 167 election where there is a sale of a business or part of a business is explained in draft policy P-188.

At the ouset, we wish to clarify paragraph 2 at page 1 of your letter concerning the recipient's test; you state that "90 percent or more of the assets must be acquired for section 167 to apply". To be exact, the recipient must acquire 90% or more of the property required to carry on the business. In other words, the recipient does not need to acquire 90% or more of the supplier's assets but must be able to carry on the supplier's business with 90% or more of the assets purchased from the supplier.

It should be noted that even where the recipient meets the 90% test, for the parties to be eligible to use the section 167 election, another test must be met; the supplier must sell a business or part of a business.

In respect of the situation where the recipient acquires all or substantially all of the business assets from the supplier except the real property, draft policy P-188 states that "any property not acquired under the agreement for the supply but required to carry on the business must fall within the remaining general margin of 10% of the fair market value ("FMV") of all the property acquired".

Therefore, where the real property used in the supplier's business is not acquired by the recipient (i.e., the recipient intends to rent from a third party or purchase another building to carry on the business), the real property subsequently acquired by the recipient must be less than 10% of all the property required to carry on the business.

In the situation described in your letter, the recipient will enter into a three year lease with the landlord. As a result, not only the term but also the value of the lease (stream of lease payments) that is used to evaluate the "all or substantially all of the property" requirement, must be within the norms of the retail business industry.

The foregoing comments represent our general views with respect to the subject matter of your letter. Unannounced proposed or future amendments to the legislation may result in changes to our interpretation. These comments are not rulings and, in accordance with the guidelines set out in GST Memoranda Series Section 1.4, do not bind the Department with respect to a particular situation.

If you require any further assistance, please call Noreen Staple at (613) 957-8232 or Jacques Allard at (613) 954-4394.

Yours truly,

J. Sitka
A/Director
Financial Institutions and
Corporate Reorganizations Division
GST Rulings and Interpretations

Ref. s. 121 & 191

Document #1400