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Section 167 election on the sale of assets of a dental practice…

By December 18, 2013November 5th, 2019Selling A Practice

So here’s the situation: a dentist is selling assets of a dental practice and asks “What about HST?”

Well, we start off with section 167(1) of the Excise Tax Act which starts off by saying the following:

Supply of assets of business

167. (1) Where a supplier makes a supply of 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, and, under the agreement for the supply, the recipient is 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,

(a) for the purposes of this Part, the supplier shall be deemed to have made a separate supply of each property and service that is supplied under the agreement for consideration equal to that part of the consideration for the supply of the business or part that can reasonably be attributed to that property or service; and

(b) except where the supplier is a registrant and the recipient is not a registrant, the supplier and the recipient may make a joint election in prescribed form containing prescribed information to have subsection (1.1) apply to those supplies.

OK, lets break it down in humanese, shall we?

Taken together, section 167(1) says that where a supplier (i.e. selling dentist) sells a business or part of a business to a recipient (i.e. purchasing dentist), then the supplier and the recipient may make a joint election such that the supplier DOES NOT need to charge HST and the recipient DOES NOT need to pay HST.  So everything is a wash.  Section 167 basically deems the purchaser to have acquired the assets for nothing (i.e. NIL consideration).  Now, there are a few conditions that must be met for this to happen.

Condition #1: Supplier is Selling a Business or Part of a Business

The supplier (i.e. selling dentist) must be selling a business or part of a business (i.e. the assets of their dental practice).  A business is an activity that includes a profession pursuant to the definition of “business” in section 123(1) of the Act.  The assets of a business (in this case, a dental practice) generally include real property, equipment, inventory, and intangibles such as goodwill.  Now if you think about an asset sale, all of these things are typically sold – with the exception of real property as there may be an assignment of a lease instead.  The sale of one particular asset will not constitute the sale of a business and hence the election under section 167(1) won’t be available (and the sale of that asset will be subject to HST).

Condition #2: Recipient is Acquiring a Business

The next condition is that the recipient (i.e. purchasing dentist) must, pursuant to the asset purchase agreement, be acquiring ownership, possession or use of all or substantially all (i.e. 90%) of the property that can be reasonably regarded as necessary for them to be capable of carrying on the business or part of a business.  This condition should be easy enough as purchasing dentists typically buy all of the assets needed to carry on a dental practice.  In other words, it’s almost like a turn-key operation.  The CRA has excluded things like accounts receivable, cash, debt, and capital stock from calculating this 90% threshold.  It remains to be seen whether this 90% threshold will stand up in court; is it based on book value, fair market value, acquisition cost, etc?  As such, it may be more like a guideline than anything else.

Condition #3: Registration Status

As we can see in section 167(b), there is an exception to when the joint election is available – namely, “where the supplier is a registrant and the recipient is not a registrant”.  So in other words, the parties can use this election in the following circumstances:

  • Supplier is NOT a registrant and Recipient is NOT a registrant
  • Supplier IS a registrant and Recipient IS a registrant
  • Supplier is NOT a registrant and Recipient IS a registrant

So the bottom line is that IF the Supplier IS a registrant, the Recipient MUST ALSO be a registrant to qualify for the joint election.

Effect of Election

If the parties qualify and make the election, then NO HST is payable on the sale of the assets under the agreement.

Filing the Section 167(1) Election

If all three (3) aforementioned conditions are met, the next step is for the parties to make the election.  To make the election under subsection 167(1), the supplier and the recipient must jointly complete Form GST44, Election Concerning the Acquisition of a Business or Part of a Business. This form is available on the CRA Web site.  If both the vendor and the purchaser are NOT registrants, then the form does not need to be filed, but must be kept in the books and records of the parties.  The Form GST44 must be filed by the purchaser with the first GST return following the completion of the transaction.  The purchaser must ensure that all property is listed correctly and described fully.  The vendor should ask for a copy of the form from teh purchaser to keep with their records.

Goodwill

Section 167.1 says that, where part of the purchase price for the assets goes to Goodwill (e.g. Dental Records), and IF the parties qualify under section 167(1) above, then NO HST is payable for the Goodwill (and this is true even if the parties do not make the election).

Leasehold Improvements

Section 167(1.1) says that the effect of the election DOES NOT apply to real property where the recipient (i.e. purchasing dentist) is NOT a registrant.  So this basically means that HST will be payable on things like leasehold improvements where the purchasing dentist is not registered for HST.  That said, the supplier (i.e. selling dentist) may be eligible to apply for a rebate under section 257 (which is beyond the scope of this blog).

Real Estate

Section 167(1.1)(a)(iii) says that the election DOES NOT apply to real property where the recipient (purchasing party) is NOT a registrant. So given that dentists and their professional corporations don’t usually register for HST (because their services are zero-rated, meaning no HST is required to be charged / collected), how can a dentist transfer real estate without paying HST?  Well, this typically happens when the recipient (purchasing party) is a holding company (not a dentistry professional corporation) and IS A REGISTRANT and charges rent to the dental practice of over $30,000 per year (which means HST is chargeable and the registrant should be registered for HST).  Note: the rent charged must be at fair market value.

Purchase and Sale Agreements

It is prudent for the dentist who is selling their assets to obtain an indemnity (i.e. a promise to pay) from the purchaser for any tax, interest and penalty that may have to be paid and to obtain an undertaking that the form 44 will be filed by the purchaser in a timely manner.  This is because it is the vendor that is liable for tax, interest, and penalty for non collection of HST if the election is not applicable, not filed, or not filed on time.

DMC