Section 167

Corporations A and B (both registered and carrying on a business) amalgamate to form AmalCo. Immediately thereafter, Corporation C, a GST/HST registered corporation, acquires all the AmalCo assets. Are Corporation C and AmalCo entitled to elect under s. 167(1) respecting that acquisition? CRA responded:

Since … Corporations A and B were the persons that established or carried on the business, AmalCo cannot be considered to have done so, since it is deemed to be a separate person for GST/HST purposes. …

[By virtue of s. 271(b)] where an amalgamation occurs for GST/HST purposes, the transfer of property or services to AmalCo by Corporations A and B under the amalgamation agreement does not constitute an acquisition made by AmalCo from those corporations, since AmalCo is deemed to be the same person and a continuation of those corporations in respect of that property or those services.

In addition, paragraph 271(c) deems the transfer of property from the predecessor corporations to the new corporation not to be a supply for GST/HST purposes.

Thus … AmalCo cannot be considered to have “acquired” a business established or carried on by another person in accordance with section 167 nor be considered the recipient of a supply of a business.

Why does a non-registrant selling a complete business to a single buyer need to make an s. 167 election, given that the sale of all tangible and intangible personal property of a non-registrant would be exempt per s. 141.1 of the ETA and since the election does not cover the sale of real property, there seems to be no instance where the election serves any purpose. CRA responded:

It is not clear why the point is made that “the election does not cover the sale of real property”. In some cases, real property may be relieved from tax where a section 167 election is filed. …

Although the section 167 election is generally available to a non-registrant … [a]n election may not be necessary if the conditions of paragraph 141.1(1)(b) are met. Under the provisions of that paragraph, the sale of personal property is generally not subject to GST/HST where the property was last acquired by the vendor exclusively (90% or more for a person that is not a financial institution, 100% for a financial institution) for use in activities that were not commercial activities and was not in fact used in commercial activities.

Paragraph 141.1(1)(b) does not include sales of real property. In cases where a non- registrant person engaged exclusively in exempt activities makes a supply of a business and taxable real property is included in the agreement for the supply, the person would, subject to section 167, be able to make an election in respect of the supply (including the real property) as long as the recipient is a registrant.

Respecting whether a supply of an interest in an individual “lease” of oil and gas property which may be operating under a joint venture agreement may constitute a supply of a business or part of a business for s. 167 purposes, CRA first reference Memorandum 14.4, paras. 24-25, stating:

[T]he co-venturer must supply all of its undivided interest (Example 1) rather than only a portion of its undivided interest (Example 2). Moreover, the sale of the undivided interest in Example 1 that is considered to be a supply of a business or part of a business includes the interest in and to the leases, lands, and petroleum substances, and tangible property for the production and processing of petroleum substances.

Before concluding that it would appear that the supply of the interest would not qualify, CRA stated:

[I]n the oil and gas industry…[c]ertain sales of leases may involve all of the properties held by a company in a particular field, covering a large geographical area, whereas smaller sales or “swaps” of individual leases, or small groups of contiguous leases may occur to improve operating efficiencies by consolidating a company’s holdings of producing leases in a particular field or area. Further, we understand that a joint venture arrangement will often have more than one lease, and a supplier may sell all of its interest in a particular lease to another person while retaining its interest in others.

CRA has indicated (2001 CBA Roundtable, Q. 51) that a s. 167 election is not available where a partnership is wound up and each partner receives an undivided interest in the partnership property (as there is not a supply of the business to one recipient). On the dissolution of a partnership under ITA s. 98(5) (i.e., all of the assets of the partnership are transferred from the partnership to a single partner), can the s. 167 election be made respecting the assets transfer to the single partner? CRA responded:

[T]he parties to the transaction [must] meet… the two following tests:

1. the supplier must sell to a single recipient a business or part of a business that was established or carried on; and
2. the recipient must be acquiring ownership, possession or use of all or substantially all of the property that can reasonably be regarded as being necessary for the recipient to be capable of carrying on the business or part as a business.

Also, for subsection 167(1)…to apply, there must be an agreement for a supply of a business that satisfies the conditions set out in subsection 167(1). Where the disposition of 100% of the partnership property from the partnership to the former member constitutes the supply of a business, and where an agreement for a supply of the business from the partnership, as supplier, to the former member exists, an election under subsection 167(1)… could be available, provided the conditions for the election are met.

In finding that the grant of a franchise by the Franchisor to a new Franchisee respecting a specific site qualified as the supply of a business that was established by the supplier (the Franchisor) notwithstanding that the Franchisor did not directly supply real estate to the franchisee and the site instead was subleased by a subsidiary of the Franchisor to the Franchisee, CRA stated:

… Real property, whether purchased or leased, is normally required to carry on a food restaurant store/business.

[Here] the Franchisor is to provide to the Franchisee the right and licence to use proprietary marks, assistance in obtaining an approved location, initial training including the services of one experienced employee and loan of manuals, as well as having plans/specifications prepared and construction, decoration, outfitting of the required fixtures, furnishings, equipment, signs, accessories, supplies, etc. necessary to permit the Franchisee to commence the operation of the Franchised Business. Since the Franchise Agreement includes terms that transfer all of the above, and terms under which the land and buildings are transferred under a Sublease assigned by the Franchisor's subsidiary, the first condition to the election is met.

Respecting the second ("all or substantially all") test, CRA stated:

Any property acquired by the Franchisee subsequently or already in the possession of the Franchisee that can reasonably be regarded as being necessary for it to be capable of carrying on the Franchised Business would need to be 10% or less of the fair market value of all the property required to carry on the business.

CRA rejects generic descriptions on GST44 such as "All real property, capital property, intangible assets such as the assignment of all leases and all inventory for the operation of a commercial real estate business," stating that the description "is not sufficiently detailed to determine if all or substantially all of the business has been acquired." What is the issue with saying “all property”? CRA responded:

The instructions on page 2 of Form GST 44 describe the type of information that should be provided as follows:

"List the land, building, equipment, inventory and any other property as defined on this page that has been acquired from the supplier. The list of property is likely described in the agreement between supplier and recipient."

As such, a detailed list of all property acquired should be provided in order for CRA to make a determination that all or substantially all of the business has been acquired.

Shares of Newco, which was incorporated solely for the purposes of purchasing all of the business assets of a supplier, are sold to a third party purchaser and Newco is immediately amalgamated with the purchaser after the asset transfer. In confirming that the s. 167 election would not be available for the business acquisition by Newco if Newco did not carry on a business before its amalgamation, CRA stated:

Under section 271, an Amalco is deemed for GST/HST purposes to be a separate person from each of its predecessors, except as otherwise provided under the ETA. … There is no provision deeming a predecessor (in this case, Newco) to acquire the characteristics of its successor Amalco. In other words, Newco's ability to register cannot be based on the proposed actions of a corporation, i.e., Amalco, that does not exist at the time Newco needs to be a registrant so it can make the section 167 election.

In confirming that a s. 167 election is not available to Amalco where an operating company ("Opco") is amalgamated with another corporation, and the amalgamated corporation (Amalco) immediately sells all of the assets, CRA stated:

One of the conditions for making an election under subsection 167(1) is for the supplier to be supplying a business or part of a business that was established or carried on by the supplier or that was established or carried on by another person and acquired by the supplier. Since a predecessor corporation (in this case, Opco) is the entity that established or carried on the business, the Amalco cannot be considered to have done so, since it is deemed to be a separate person for GST/HST purposes. Moreover, the Amalco did not acquire the business from its predecessor (Opco) since paragraph 271(c) deems the transfer of property from Opco to Amalco not to be a supply for GST/HST purposes.

A corporation (“Newco”) is incorporated solely for the purposes of purchasing all of the business assets of a supplier. Its shares then are sold to a third party purchaser and it is immediately amalgamated with the purchaser after the asset transfer. CRA stated:

One of the conditions for making a section 167 election is that if the supplier is a registrant, the recipient must be a registrant … [which] is a question of fact …

There is no provision deeming a predecessor (in this case, Newco) to acquire the characteristics of its successor Amalco. In other words, Newco's ability to register cannot be based on the proposed actions of a corporation, i.e., Amalco, that does not exist at the time Newco needs to be a registrant so it can make the section 167 election.

Under the former version of s. 167(1), accounts receivable were not considered to be included in the determination of whether "all or substantially all" of the property was being transferred.

A and B hold a 40% and 60% interest, respectively, in a joint venture. Is s. 167 available respecting he following successive transfers of JV interests?

1. Transfer by A to B of 25% interest;

2. Transfer by B to C of its entire 85% interest; and

3. Transfer by A to C of its (remaining) entire 15% interest?

CRA responded:

The following responses assume that where an arrangement is described as a joint venture in the question it has the characteristics of a joint venture as delineated in … P-103 … . According to that policy, where an interest in a joint venture with those characteristics is supplied the recipient generally will, to the extent the recipient purchases an undivided interest in all the joint venture property and the rights and obligations attached to the interest, qualify as having acquired all or substantially all of the assets required to carry on the business. In that case, subsections 273 167(1) and (1.1) would apply where the supply is made by one of the co-venturers.

With respect to the facts in this question:

• The transfer by A to B of 25% interest would not meet the criteria for a section 167 election.

• Assuming that B is transferring to C its entire interest when it transfers its 85% share, and that the supply is not from a registrant to a non-registrant, the supply would qualify for a section 167 election.

• The transfer by A to C of its remaining entire 15% interest may qualify depending on the facts of the situation.

Concurrent sales by A of the 25% and 15% interests would not meet the criteria for the election under subsection 167(1) as the provision clearly envisions the supply of a business from one supplier to one recipient . Where A carries on the business with the 15% interest after the 25% interest is sold and sells it to a single recipient, the election may be available.

"The supply by a partnership of an undivided interest in the partnership property to one of the partners would generally not be considered to be a supply of a business or part of a business because it cannot operate on its own and as a result, the election under subsection 167(1) would not be available."

Where the purchaser of a "mothballed" restaurant must spend more than 10% of the purchase price to equip the restaurant before beginning its operations, the "all or substantially all" test would not be satisfied.

"Where a person purchases the land, building, or the manufacturing equipment, all the related office equipment and goodwill then generally the person is acquiring all or substantially the property that can reasonably be regarded as being necessary to carry on the business ...".

R.C. discusses various requirements for the purchase of an undivided interest in an oil and gas joint venture to qualify for the election.

Various tenants in common entered into a joint venture agreement to build and operate a commercial building on land they held through a nominee company. A manager appointed by the Management Committee has been collecting and accounting for all of the GST on the rents and other income from the building. A participant’s interest in the joint venture will be sold for cash to another participant. CRA stated:

[W]hen a participant in this joint venture sells his/her undivided interest in the joint venture property, and the rights and obligations attached to this interest, the recipient would be considered to have acquired all or substantially all of the assets required to carry on a business.

The vendor and the recipient would, therefore, be able to make an election, pursuant to section 167, to have no tax payable on the supply, unless the recipient is not registered.

90%/capability tests

7. The value of any property that is not acquired under the agreement for the supply, but that the recipient requires to carry on the business must generally be not more than 10% of the fair market value of all the property necessary to carry on the business.... The recipient must be capable of carrying on the same kind of business that was established or carried on, or acquired, by the supplier, with the property that the recipient has acquired under the agreement.

Part of business

9. In general, a "part of a business" is an activity that may be a functionally and physically discrete operating unit, or it may be an activity that supports or is related to the broader business, but is organized as a separate activity that is capable of operating on its own. The guidelines that apply when determining if there is a supply and acquisition of a business also apply when determining if there has been a supply and acquisition of "part of a business". [CRA then provides example of the sale (eligible for the election) by a pulp and paper company of the inventory, equipment and goodwill of its printing division, with the real estate being leased to the purchaser.]

Transfer of franchise business on turnkey basis/realty may not be crucial

21. In the case of a supply by a franchisor to a franchisee of a new business, the franchisor must make a supply of a business that was established (i.e., a turn-key operation and not just certain individual assets) in order to qualify for the election under subsection 167(1). In general...the following property and services should be included...: right to use a trade name/trademark, land and building, equipment necessary to operate the business, initial inventory, training of principals and staff, and operating manuals.

22. ...[W]ith respect to some service businesses, the nature of business is such that the land and building are not significant to the business operations (e.g., the office space required is minimal and the service is provided at the customer's location). In this case, a supply that does not include the land and building may still qualify as the supply of an established business... .

Transfer of an undivided interest in a joint venture

24. The transfer of an undivided interest in a joint venture could qualify for the election under subsection 167(1) if particular conditions are met. ...

Form and manner of filing

31. The estate and the beneficiary must jointly elect to have subsection 167(2) apply. There is no prescribed form for this election and nothing needs to be filed to notify the CRA that the election is being used.

Effect of the election

32. If the conditions listed in paragraph 30 are met and the election is made, the beneficiary is deemed to have acquired the property for use exclusively in commercial activities of the beneficiary, and no GST/HST is payable on the supply from the estate to the beneficiary.

Requirements for rollover

25. A non-taxable supply of real property can also result if the real property being supplied is part of the supply of the business assets of a deceased individual. This tax-free roll-over of business assets of a deceased individual occurs if:

• immediately before the individual died, the individual held the property for consumption, use or supply in the course of a business carried on immediately before the individual's death,
• the estate of the deceased individual makes the supply in accordance with the individual's will or the laws relating to the succession of property on death,
• the recipient of the supply is an individual who is a beneficiary of the estate and a registrant,
• the property is received for consumption, use or supply in the course of commercial activities of the recipient individual, and
• the estate and the recipient jointly elect to not have tax payable in respect of the supply.

26. In these circumstances, the recipient individual is deemed to have acquired the property for use exclusively in commercial activities of the individual.

Requirements for election

27. To make this election under subsection 167(2), the records of the estate and the registrant beneficiary must reflect that the parties have jointly elected not to have tax payable in respect of the supply and the parties must act in a manner consistent with having made this election. (This election will be discussed in greater detail in a forthcoming memorandum in Chapter 3, Tax on Supplies.)