Businesses are bought and sold every day in the ever-changing corporate landscape. Many business owners can move up quickly and increase their wealth by selling a booming business, while others can profit from purchasing a business that suits them. This constant changing of hands between buyers and sellers can help revitalize the economy and promote personal well-being. However, sometimes tax complications arise from selling or buying these more valuable commodities.
In Canada, there may be an option for avoiding the cashflow implications of the GST/HST in the form of the GST44, which can exempt business owners from tax obligations when selling a business. To learn more about the business implications of the Canadian tax code, consider speaking with an experienced tax lawyer from Jeremy Scott Law by calling (902) 403-7201.
GST/HST in the Sale of a Business
Buying and selling businesses in Canada can be an incredibly profitable venture. There are many franchises already established, local businesses, and other participants in the country’s flourishing economy.
However, as businesses can be bought and sold the same as any product or service, there are situations in which taxes may be owed on the sale of a business. Depending on the province, buyers may pay either the Goods and Services Tax (GST) or the Harmonized Sales Tax (HST).
According to the Canada Revenue Agency (CRA), rates can range anywhere from 5% to 15%. While that may not amount to much when purchasing groceries, it adds up when purchasing a six-figure business.
This additional expense can impact the profits of a business and make purchasing or selling a business less desirable. In addition, these expenses can complicate the tax filing process for prospective business owners.
Section 167
But there is a solution! According to Section 167 of the Excise Tax Act, business owners can use the GST44 to file for an exemption from GST/HST in the purchase or sale of a business. This act is a legal ruling extrapolating on the various types of taxes and when they may not apply to certain exemptions. By filing this form, business owners effectively avoid paying the GST/HST on the purchase of the business.
For business owners, it means that under certain circumstances they can avoid paying the hefty taxes on the purchase or sale of their businesses. This exemption can help save business owners money and promote a healthier economy.
For more information on GST/HST and potential exemptions, consider speaking with an experienced tax lawyer from Jeremy Scott Law.
Exemptions
The specific exemptions under the GST44 are for the purchase of the a business or the acquisition of a functional unit of a business. If the sale of a business meets these requirements, the requirement to collect and remit GST/HST is removed.
To meet these requirements, the recipient must be purchasing a business or part of a business that the recipient intends to carry on as such.
Acquiring More Than 90% of a Business
The first scenario that is generally applicable is the purchase of an entire business on the part of the recipient. If the recipient wishes to be exempt from GST/HST on the purchase, they must be acquiring ownership of at least 90% of the business’s assets, whether that be a building, tools, and equipment related to the business, or intangibles such as branding, trademarks, and goodwill.
If the recipient is acquiring the majority of the business in this way, they can file the GST44 jointly with the seller to apply for tax exemption.
Combining With an Existing Business
On occasion, large businesses may be interested in acquiring a functional unit of a business that supplies a certain product, service, or area. For example, if a furniture manufacturing company wishes to acquire the shipping operations of another manufacturer. By purchasing at least 90% of the assets of the shipping division, the operation is treated as its own business unit and may be eligible for exemption.
In this case, the recipient and the supplier would jointly file the GST44 to apply for exemption.
Filing the GST44
If both the recipient and the supplier agree to pursue tax exemption on the purchase of the business, they must jointly file the GST44. This form is available on the Canada Revenue Agency website, and can be filed electronically in the same place.
To file the GST44, the recipient of the business may need to be a GST/HST registrant, regardless of whether or not the supplier is also a registrant. However, if the recipient is not a registrant, then the supplier must also be a non-registrant. If the recipient is a non-registrant but the supplier is a registrant, this can be easily remedied. All the recipient must do is register for the GST/HST and then file for exemption.
In addition, the GST44 must be filed before the recipient of the business would be required to pay their GST/HST tax returns to the CRA. If the form is not filed by that deadline, GST/HST may be payable on the purchase of the business, even if the recipient intended to file an exemption via the GST44.
Frequently Asked Questions
Listed below are some frequently asked questions regarding the GST44.
What Counts as Part of a Business for Tax Purposes?
Generally, a part of a business is considered to be a functionally and physically discrete unit that can operate on its own and is considered a separate entity.
Are Franchises Eligible for the GST44?
Franchises are eligible for the GST44, provided they are selling an established business and not just the rights to franchise in the area.
Contact an Experienced and Dedicated Canada Tax Lawyer Today
Without having to worry about the added expense of GST/HST, business owners can make confident decisions to expand their companies and grow in the market. Depending on the size of the acquisition, the GST44 can save business owners thousands on their entrepreneurial pursuits. For more information on the intricacies of the Canadian tax code, consider speaking with a skilled and experienced tax lawyer from Jeremy Scott Law. Schedule a consultation by calling (902) 403-7201.