Subsection 22(1) - Sale of accounts receivable
Office Overload Co. Ltd. v. MNR, 65 DTC 690 (TAB)
The election under s. 85D(1) of the pre-1972 Act was not available for accounts receivable included in a business purchased by the taxpayer from a non-resident vendor who did not carry on business in Canada given that the vendor accounted for accounts receivable on a cash basis and because the provision did not apply to a vendor who is a non-resident of Canada and is not doing business in Canada. Mr. Davis stated (at p. 697):
"... the section taken as a whole, which, in my opinion, is the way in which it must be interpreted, is intended to apply to persons who fall to be taxed or otherwise dealt with under the provisions of the Canadian Income Tax Act and who report to the Canadian Government the income arising from the operation of the business or businesses whose sale is the central concern of the said section 85D. That section is, in my opinion, intended to afford a continuity in the treatment of accounts receivable where the sale of a business intervenes ... ."
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|Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Person
|"person" not to be intepreted as extending to someone not subject to Cdn tax
Amalco can make s. 22 election (if no business interruption)
1.62.1 Where a new corporation that was formed on an amalgamation that was governed by section 87 sells to a purchaser all or substantially all the property that was used by a predecessor corporation in carrying on its business, including debts that had been previously included in the predecessor corporation’s income and which are still outstanding at the time of the sale, an election under section 22 by the new corporation will be accepted as valid. This will be the case even though the requirement in section 22 that the debts must have been, or would be, included in the new corporation’s income will not have been met. The acceptance of the election in these circumstances will be conditional on all other requirements of section 22 being satisfied and on there being no disruption in the operation of the business during the period from the time of the amalgamation to form the new corporation until the time the business is sold to the purchaser.
Following the amalgamation of “Predecessor 1” (which carried on the “Businesses”) with its parent (“Predecessor 2”), Amalco transferred all the assets of the Businesses to the “Partnerships” under s. 97(2), which continued to carry on the Business. Was the election under s. 22 respecting the transferred accounts receivable valid? In finding that the condition in s. 22, that there still be outstanding accounts receivable that were required to be included in computing Amalco’s income in respect of that business, appeared to not be met, CRA stated:
The only inclusion in income [of] Amalco … in respect of accounts receivable of Predecessor 1 is under 12(1)(d) and it includes in its income a reserve (there is no presumption that the underlying receivable was included by Amalco in its income).
Respecting the requirement that Amalco have carried on the Business, the Directorate stated:
[Y]ou express the view that because Amalco sold the assets used in the Businesses … minutes after the amalgamation, it did not “carry on the business” of Predecessor 1, hence the election under section 22 was not valid. … That view might arguably be consistent with … Gillen… .
However, the Directorate concluded that the election was satisfied (on the basis that the other conditions of s. 22 were satisfied and the business was continued) stating:
Provided there is no disruption in the continued operation of the business … the context and purpose of section 22 are satisfied where a corporation resulting from an amalgamation that is governed by section 87 or its predecessor have included receivables from that business in their income and have used property in carrying on that business.
Paragraphs 87(2)(g) and (h) provide a continuity in the history of the accounts receivable of the subsidiary predecessor corporation and ensures a seamless transition of the reserves mechanism by providing the same income inclusions and deductions on a consolidated basis as if Predecessor 1 had continued its existence in Amalco. …[R]efusing a section 22 election from being made at any time after an amalgamation runs against the legislative scheme of section 87.
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|Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(g)
|failure of s. 87()2)(g) to deem continuity for s. 22 purposes not fatal
Would a Canadian corporation which has carried on a business through a non-resident branch and which then sells all or substantially all of the assets of the business including trade receivables be able to make the s. 22 election? After referring to the statement in IT-188R (Archived), para. 1, that "section 22 is applicable upon election by a vendor and a purchaser, where the vendor…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," CRA responded (TaxInterpretations translation):
The commentary in paragraph 1…is not restricted only to the situation where a business is carried on in Canada. Consequently, there are other situations where the election contemplated by section 22 could be made.
If the conditions in s. 96(3)(a) are met, then the s. 22 election is deemed by paragraph 96(3)(b) to have been made or executed by each other member of the partnership.
Regarding the consequences of the sale of a business of a financial securities advisor who provided life insurance policies and other products to clients, CRA stated:
If the vendor and the purchaser jointly elect under subsection 22(1):
- the vendor can deduct the difference between the face value of the receivables sold and the consideration the vendor receives from the purchaser in computing the vendor’s income,
- The purchaser must include this difference in its income and will be able to treat the receivables as if they had arisen while the purchaser owned the business. In this way, the purchaser will be able to deduct amounts in respect of bad and doubtful debts.
If an election under subsection 22(1) is not filed, the sale of the receivables will be recognized as a sale of capital property, so that the vendor's losses, and subsequently the purchaser's, will be capital losses.
An election under s. 22 is not available where parts of a business or assets of a business are acquired by a number of purchasers.
The deeming rule in s. 22(1)(c) applies to permit a reserve under s. 20(1)(l) for debts arising from loans that were not acquired by the purchaser in the ordinary course of the money-lending business of the purchaser.
17 September 1992 T.I. (Tax Window, No. 24, p. 4, ¶2195)
A taxpayer cannot elect under both ss.85(1) and 22 with respect to accounts receivable.
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|Tax Topics - Income Tax Act - Section 85 - Subsection 85(1)
31 August 1992 T.I. 921342 (April 1993 Access Letter, p. 136 ¶C20-1142)
A privately-appointed receiver-manager would be considered to transfer property to a purchaser on behalf of the debtor. Accordingly, it is the debtor who should sign the election. Authority of the receiver-manager to dispose of the debtor's property would not be sufficient authority to file income tax elections with respect to such dispositions.
30 November 1991 Round Table (4M0462), Q. 14.3 - Sale of Debts (C.T.O. September 1994)
In considering a situation where a corporation had two divisions, one of which did printing and the other which did photo typesetting, and all the assets of the first division were sold to another corporation which continued the operation in the same manner and under the same name, RC stated that "the fact that the corporation that has acquired the assets used in the printing division can be considered to be carrying on a separate business does not mean that the vendor corporation was operating its two divisions in the form of two separate businesses."
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.
IT-206R "Separate Businesses"
General discussion of what constitutes a separate business.
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|Tax Topics - Income Tax Act - Section 111 - Subsection 111(5) - Paragraph 111(5)(a)