The Section 22 Election for Accounts Receivable in an Ontario Business Sale

When a business changes hands in an asset sale, accounts receivable — money customers still owe the business — are usually part of the deal. But receivables rarely sell for their full face value. Some will never be collected, and buyer and seller both know it going in. The purchase price for those receivables is typically discounted to reflect that reality, and Canadian tax law includes a specific joint election, commonly referred to as the section 22 election, that both sides can consider to address how that discount is treated for tax purposes.

This article explains the problem the election is generally used to solve, how it works in plain language, and what buyer and seller each need to think about.

The Problem the Election Solves

Say a business has a meaningful balance of outstanding accounts receivable on its books, but realistically, a portion of that will never be collected — some customers are slow payers, some are disputing invoices, and some simply won't pay. A buyer isn't going to pay full face value for receivables like that; the purchase price gets discounted to reflect the real collectability of the debt.

Without something like the section 22 election, the tax treatment of that discount can get complicated for both sides. The seller may not automatically get the kind of bad-debt tax treatment they'd have gotten if they had simply written off the uncollectible portion themselves while still running the business. The buyer, meanwhile, may not automatically get to treat a later write-off of the same uncollectible amount the same way an ordinary business bad debt would be treated.

How the Election Works, in Plain Language

In general terms, this kind of joint election lets the seller and buyer agree that the receivables are being sold at their actual (discounted) value, and that the seller can treat the shortfall between face value and sale price consistently with how a bad-debt loss on those receivables would otherwise have been treated. The buyer, correspondingly, is generally able to treat any amounts that later prove uncollectible in a similarly consistent way, rather than being stuck with less favourable treatment simply because the receivables changed hands through a sale rather than being collected (or written off) by the original business.

The mechanics — the specific conditions, the filing requirements, and exactly how the numbers flow through each party's tax return — are technical and need to be handled by an accountant experienced with this kind of election. This article is describing the general shape of the tool, not a how-to for completing it.

Who Needs to Agree — and When

This is a joint election, meaning both the buyer and the seller need to agree to make it and typically need to file supporting documentation with their respective tax returns. A few practical points follow from that:

• It has to be addressed as part of the deal, not left to be sorted out afterward — the purchase agreement should specifically deal with whether the parties will make this election and how the receivables are being valued.
• Both sides have their own reasons to want it, but not identical reasons — the seller is generally focused on preserving bad-debt-style treatment on the discount, while the buyer is generally focused on how any later uncollectible amounts will be treated on their own return.
• It generally needs to be filed within the timeframes required for the parties' relevant tax returns, so this isn't something to leave until months after closing — your accountants on both sides should coordinate on timing as part of the closing process.

What Happens Without the Election

If the parties don't make this kind of election, the receivables are simply bought and sold as an asset like any other in the deal, without the specific tax treatment the election is designed to preserve. That doesn't mean the transaction can't proceed — many receivables purchases happen without this election being relevant, particularly where the discount is minor or the receivables are expected to be substantially collectible.

Where the discount is meaningful, though, skipping the conversation can leave value on the table for one or both sides, purely because of how the shortfall ends up being characterized for tax purposes rather than because of anything about the underlying receivables themselves. This is exactly the kind of detail that's easy to overlook in a fast-moving asset sale and expensive to fix after the fact.

Practical Steps for Buyer and Seller

• [ ] Get a realistic, current assessment of collectability for the receivables being purchased — don't rely on face value alone.
• [ ] Raise whether this kind of election makes sense for the deal early, ideally at the letter of intent stage, not after the purchase agreement is drafted.
• [ ] Have both parties' accountants confirm eligibility and agree on the mechanics before the closing documents are finalized.
• [ ] Make sure the asset purchase agreement expressly addresses the election and the agreed valuation of the receivables.
• [ ] Calendar the relevant filing deadlines with both accountants so nothing slips after closing, when attention naturally shifts elsewhere.

Frequently asked questions