When buying or selling a business, filing a Section 167 Election (Form GST44) allows the transaction to be GST/HST free. If the CRA audits and invalidates this election, the seller is suddenly liable for the entire sales tax amount, meaning you must quickly file a Notice of Objection.
Selling your business is the culmination of years of hard work, but a mishandled tax election can turn your successful exit into a financial nightmare. Under standard Canadian tax law, selling commercial assets (like equipment, inventory, and goodwill) requires the seller to collect GST/HST from the buyer and remit it to the Canada Revenue Agency (CRA). However, to avoid crushing buyers with massive upfront tax burdens, the government created a special loophole.
Section 167 of the Excise Tax Act allows the buyer and seller to jointly elect to make the sale of a business essentially tax-free. 💼 To qualify, the seller must be transferring a complete “business” or part of a business, acquiring all or substantially all (at least 90%) of the property necessary to run it. The CRA routinely audits these high-value transactions. If you are operating in cities like Ottawa, Victoria, Kelowna, or Saskatoon, and the CRA decides your sale was merely a dump of “bare assets” rather than a functioning business, they will void the election and hit the seller with a tax bill for 5% to 15% of the total purchase price.
Step-by-Step Process in Canada
Defending a Section 167 election requires a deep dive into corporate law and tax policy. Because this is federal law, the defence strategy is standard across all Canadian provinces. Here is what you must do when the CRA auditor comes knocking.
Step 1: Verifying the GST44 Election Form
The very first thing the CRA auditor will ask for is a copy of the Form GST44 (Election Concerning the Acquisition of a Business or Part of a Business). 📄 You must ensure that this form was properly signed by both the buyer and the seller on or before the closing date of the transaction. Crucially, the buyer must have been registered for GST/HST prior to the transaction closing. If the form was never signed, or the buyer was not registered, the election is legally void from the start.
Step 2: Proving the Supply of a Complete Business
The auditor’s main angle of attack will be arguing that you did not sell a “business.” To defeat this, your tax lawyer must prove that the buyer acquired the critical components necessary to continue operations. You should gather the Asset Purchase Agreement (APA), lists of transferred employees, assigned commercial leases, transferred supplier contracts, and client lists. If the buyer immediately shut down the store and just used the equipment elsewhere, the CRA will strongly argue the election is invalid.
Step 3: Managing the CRA Auditor’s Information Requests
During the audit, the CRA will send extensive questionnaires to both the buyer and the seller. 📧 It is critical that both parties coordinate their responses. If the buyer tells the CRA they only wanted the machinery and did not care about the brand name, they can accidentally sabotage the seller’s tax position. Having a unified legal strategy and having a professional draft the responses to the auditor is highly recommended to avoid accidental admissions.
Step 4: Filing an Objection and Protecting Both Parties
If the CRA formally denies the Section 167 election, they will issue a Notice of Reassessment to the seller, demanding the uncollected GST/HST plus interest. The seller must file a Notice of Objection within 90 days. Simultaneously, the seller should check the Asset Purchase Agreement; standard commercial agreements include an indemnity clause stating that if the CRA invalidates the GST44 election, the buyer is legally obligated to reimburse the seller for the GST/HST owed.
How Much Does it Cost in Canada?
A business sale usually involves hundreds of thousands or millions of dollars, making the potential tax liability enormous. 💰 As of May 2026, fighting a Section 167 audit involves significant professional fees in Canadian Dollars (CAD):
- CRA Filing Fee: $0 CAD to file a Notice of Objection.
- Corporate Tax Lawyer (Audit Phase): Retaining a lawyer to manage the auditor’s queries and coordinate with the buyer’s counsel usually costs between $3,000 and $8,000 CAD.
- Notice of Objection Prep: Drafting complex legal arguments regarding the definition of a “business” under the Excise Tax Act typically ranges from $5,000 to $12,000 CAD.
- Tax Court Litigation: If the dispute escalates to a full trial at the Tax Court of Canada, legal fees frequently start at $20,000 CAD and go upwards based on the transaction size.
| Legal / Tax Action | Estimated Professional Fee (CAD) |
|---|---|
| Managing CRA Audit Inquiries | $3,000 – $8,000 |
| Drafting Notice of Objection | $5,000 – $12,000 |
| Tax Court of Canada Appeal | $20,000+ |
| Reviewing APA Indemnities | $1,000 – $2,500 |
How Long Does the Process Take?
A CRA audit on a corporate buyout is highly detailed and moves slowly. ⏱️ The auditor may spend 4 to 8 months reviewing contracts and interviewing the buyer and seller. If you are reassessed and file a Notice of Objection, expect your file to sit in the CRA Appeals Division queue for 9 to 15 months before an appeals officer even looks at it. Resolving the matter fully, especially if civil litigation between the buyer and seller is triggered, can take 2 to 4 years.
Frequently Asked Questions (FAQ)
Who is liable if the CRA denies the GST44 election?
Under the Excise Tax Act, the seller is the party legally responsible for collecting and remitting the tax. Therefore, the CRA will always assess the seller for the missing GST/HST, not the buyer. The seller must then try to collect from the buyer through private civil contracts.
What does ‘substantially all’ mean to the CRA?
In Canadian tax law, the CRA administratively defines “all or substantially all” as 90% or more. This means the buyer must be acquiring 90% or more of the property that is reasonably necessary to carry on the business.
Do we submit the GST44 form to the CRA immediately?
Generally, no. The buyer simply keeps the signed GST44 form on file to present to the CRA in case of a future audit. However, the buyer must file the form with their GST/HST return for the reporting period in which the purchase occurred.
Can we use Section 167 if we only buy a single truck from a company?
No. Buying a single piece of equipment or a single asset is not considered buying a “business.” The transaction would just be a standard sale of an asset, and the seller must charge GST/HST on the truck.
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