When buying or selling a Canadian business through an asset sale, filing a joint Section 22 Election allows the seller to claim a fully deductible business loss on unpaid accounts receivable. Without this election, the Canada Revenue Agency (CRA) strictly classifies it as a capital loss, which is only 50% deductible and highly restrictive.
When you sell a business in Canada, you can either sell the corporate shares or sell the underlying physical and digital assets. If you opt for an asset sale in cities like Calgary, Montreal, or Halifax, you will likely be transferring your customer list, equipment, inventory, and your outstanding Accounts Receivable (A/R) to the new buyer. Accounts receivable represents the money your customers still owe you for products or services already delivered.
Because collecting old debts is risky, a buyer will almost never pay full face value for your A/R. 📍 For example, if your customers owe you $100,000, the buyer might only offer you $80,000. Under normal Canadian tax rules, the $20,000 you lost would be considered a capital loss, which is generally useless unless you have other capital gains to offset it. However, the Income Tax Act provides a brilliant workaround. By filing a joint Section 22 election, you can legally convert this restricted capital loss into a fully deductible, ordinary business loss. In this guide, we will explain how to execute this strategy seamlessly.
Step-by-Step Process for a Section 22 Election in Canada
A Section 22 election must be a cooperative effort between the buyer and the seller. It requires precise wording in your legal contracts and accurate tax filing. Here is how your legal and accounting teams will structure the deal.
Step 1: Agreeing on Face Value and Sale Price
During the negotiation phase of the business sale, both parties must audit the accounts receivable ledger. 🔍 You must agree on two specific numbers: the actual face value of the outstanding invoices (what the customers owe) and the discounted sale price (what the buyer is willing to pay you in cash for the right to collect those invoices). Let’s assume the face value is $100,000, and the agreed sale price is $80,000.
Step 2: Drafting the Asset Purchase Agreement (APA)
Your corporate lawyer must explicitly include language in the Asset Purchase Agreement (APA) stating that both the buyer and seller agree to file an election under Section 22 of the Income Tax Act. This clause legally binds the buyer to sign the necessary CRA forms after the transaction closes. Without this clause, an uncooperative buyer could refuse to sign, ruining your tax strategy.
Step 3: Recognizing the Loss and Gain Rules
Once the deal closes, the tax magic happens. 💸 For the seller, the $20,000 difference between the face value and the sale price becomes a fully deductible business expense, reducing their overall corporate tax bill for that year. For the buyer, if they manage to collect $90,000 from the customers (which is $10,000 more than they paid), that extra $10,000 is taxed as regular business income. If the buyer only collects $70,000, they get to claim the $10,000 shortfall as their own business bad debt expense.
Step 4: Completing and Filing CRA Form T2022
To finalize the process, both the buyer and the seller must sign CRA Form T2022 (Election in Respect of the Sale of Debts Receivable). Your Chartered Professional Accountant (CPA) will attach this jointly signed form to the corporate tax return (T2) for the tax year in which the business was sold.
How Much Does it Cost in Canada?
Executing a Section 22 election does not involve paying a fee directly to the government, but it does require professional accounting and legal oversight. As of May 2026, here are the expected costs to properly structure an asset sale involving accounts receivable.
| Professional Service | Estimated Cost (CAD) |
|---|---|
| Corporate Lawyer (Drafting the APA) | $5,000 – $15,000+ |
| CPA (Valuing the Accounts Receivable) | $2,000 – $5,000 |
| CPA (Filing T2022 & Tax Return) | $1,500 – $3,500 |
| Potential Tax Savings for Seller | Often exceeds $10,000+ (depending on the A/R discount) |
- Win-Win Scenario: While you have to pay professional fees, a Section 22 election guarantees that the CRA treats your loss fairly as an operational business expense, saving the seller thousands of dollars in corporate taxes.
How Long Does the Process Take?
The legal drafting of the APA and the valuation of the receivables occurs during the standard 30 to 60-day due diligence period before the business is officially sold. Once the sale closes, the actual Form T2022 is filed during the standard corporate tax season. The election must be filed on or before the earliest date that either the buyer or the seller is required to file their respective tax return for that specific year.
Frequently Asked Questions (FAQ)
Does Section 22 apply if I sell my corporate shares?
No. Section 22 elections are exclusively for asset sales where the accounts receivable are being transferred from one legal entity to another. In a share sale, the accounts receivable simply remain inside the existing corporation, so no transfer occurs.
Can we file the Section 22 election late?
The CRA is extremely strict about deadlines. If you fail to file Form T2022 on time with your tax return, you must submit a formal written request to the CRA for late filing, and you may be subjected to severe financial penaltiesāif they accept it at all.
Do we have to notify the customers about the sale?
While not strictly a tax requirement, under Canadian commercial law, you must generally notify the debtors (the customers) that their accounts have been assigned to a new buyer. Otherwise, if a customer pays the old owner, their legal debt is considered settled.
What if the buyer and seller are not dealing at arm’s length?
If the buyer and seller are related (e.g., a parent selling to a child, or transferring between sister companies), you can still file a Section 22 election. However, the CRA will heavily scrutinize the transaction to ensure the agreed sale price represents true Fair Market Value.
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