The Section 22 Election in an Ontario Asset Sale: What It Does and Who Benefits

When a business is sold as a collection of assets rather than shares, its accounts receivable — money customers still owe the business — usually get sold along with everything else. Because receivables are almost never worth exactly their face value by the time a sale closes, the buyer and seller need a way to treat the shortfall sensibly for tax purposes. That's the job of a specific federal income tax election that practitioners commonly refer to as the "section 22 election."

This article explains, in plain terms, what problem the election solves, who needs to agree to it, and why it comes up in almost every Ontario asset sale that includes meaningful receivables.

The mechanics here are genuinely technical federal tax law — this is background to help you understand what your accountant and lawyer are talking about, not a substitute for their advice on your specific numbers.

The Problem: Receivables Are Rarely Worth Face Value

A business's accounts receivable are recorded on its books at what customers owe. In reality, some portion is usually uncollectible — customers who won't pay, disputes, accounts too old to chase. A buyer purchasing those receivables as part of an asset deal will almost always pay less than their full face value to reflect that risk.

Without special tax treatment, that gap between face value and purchase price can land awkwardly: the seller may not get to treat the discount the way an ordinary business loss would be treated, and the buyer collecting on the receivables afterward may not get sensible tax treatment for amounts that never actually get paid.

What the Election Does, in Plain Terms

The joint election lets the buyer and seller agree, for tax purposes, to treat the receivables in a way that lets the seller claim the shortfall as a deductible loss connected to its business, while giving the buyer the ability to treat any receivables that later prove uncollectible as a bad debt, much as the seller could have before the sale. Both parties have to agree to make the election together — it isn't something either side can do unilaterally.

Who Actually Uses It

This comes up specifically in asset sales that include the seller's accounts receivable. It is not relevant to a share sale, where the receivables never change legal ownership — they simply stay inside the corporation whose shares are being sold. It matters most where receivables make up a meaningful part of the business being purchased, which is common in service-based and business-to-business operations.

Without the election, a seller who sells receivables at a discount could find that shortfall treated as a capital loss rather than a fully deductible business loss — a real difference in the seller's actual after-tax outcome. The election is one of several routine tax steps in an asset sale, alongside things like allocating the purchase price across asset classes, that exist specifically to keep each side's tax treatment aligned with the economic reality of what they agreed to.

Why It Comes Up in Negotiations

Because the election affects how the receivables are treated for both parties, it typically gets addressed directly in the asset purchase agreement, including:

• How the receivables are valued and what portion of the total price is allocated to them.
• Whether both parties commit, contractually, to make the election jointly after closing.
• Who handles collection of receivables after closing, and how any shortfall against the agreed valuation is dealt with between the parties.

Getting the Mechanics Right

Making the election correctly involves specific procedural steps and a filing that ties to the parties' income tax returns — the details matter, and getting them wrong can mean losing the benefit the election was meant to provide. This is squarely an accountant's and tax lawyer's job to execute correctly on your specific transaction; treat this article as background for that conversation, not a how-to guide.

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