- The GST/HST section 167(1) election is available only if the buyer acquires all or substantially all of the property reasonably necessary to carry on the business or part of it.
- A valid GST/HST election means no GST/HST is payable on the property and services supplied under the sale agreement, but tax can still apply to taxable sales of real property where the buyer is not a registrant; how the election relates to a balance you already owe is worth confirming with an accountant.
- Vacation pay accrued and due before the sale stays with the seller, while vacation pay accrued but due only after the sale passes to the purchaser.
If you owe the Canada Revenue Agency for HST, payroll source deductions or income tax, selling the business may feel like a way out, or like something that is now impossible. In practice, many sellers with balances still sell, but the debt becomes part of the negotiation.
This article explains how a tax balance tends to affect a sale in Ontario, what buyers commonly ask for, and where GST/HST and employee obligations come in. Whether a debt can follow the business to a buyer depends on how the deal is structured and on the facts, so confirm it with a lawyer or accountant.
Why the debt matters to a buyer
A buyer wants to take over a business that works, not a surprise bill. If the business owes the CRA, the buyer will ask whether any of that debt could become its own problem and whether the price covers it. The answer depends on whether the sale is of shares or assets, what exactly is owing and who owes it (the company or you personally). A lawyer and an accountant can confirm this for your situation.
What buyers commonly ask for
- A current statement of account for each CRA program (HST, payroll, corporate income tax) so they can see the real balances.
- Proof that returns are filed and up to date.
- A promise in the purchase agreement that you have disclosed all tax debts, backed by an indemnity if you did not.
- Payment of the debt from the sale proceeds at closing, often directly to the CRA.
- A holdback, meaning part of the price is kept back until the tax position is confirmed.
None of these is automatic. They are negotiated terms, and a well-prepared seller who has gathered the numbers early is in a stronger position.
The GST/HST election and your balance
If the buyer acquires all or substantially all (generally 90% or more) of the property reasonably necessary to carry on the business or part of it, you and the buyer may be able to make a joint section 167(1) election; selling individual assets alone does not qualify. If you are a GST/HST registrant the buyer must be one too, and the election is made on Form GST44. With a valid election, no GST/HST is payable on the property and services supplied under the sale agreement, so none is collected at closing, although tax still applies to taxable sales of real property where the buyer is not a registrant.
Notice what the election does and does not do. It deals with tax on the sale itself. How it relates to HST you already owe for earlier reporting periods depends on your situation, so it is worth confirming with an accountant or lawyer. Without an election, or where less than substantially all the property is sold, the sale is treated as separate supplies of each property and service, so GST/HST may apply to taxable items. The buyer files Form GST44 by the due date of its return for the first reporting period in which tax would otherwise have been payable, although the CRA may set a later day on the buyer's application. Even with the election, tax can still apply to taxable services you provide to the buyer and to taxable leases and licences.
Employees, payroll and vacation pay
If the buyer keeps your staff, their service with you carries over to the buyer for Employment Standards Act purposes. Vacation pay accrued and due before the sale stays with you, while vacation pay accrued but due only after the sale passes to the buyer. These points matter when you are short of cash, because unpaid amounts owed to staff can complicate the closing adjustments.
If the buyer later ends someone's employment, it owes notice or pay in lieu based on combined service, and gets no credit for notice you gave at the time of sale. Employees who are not hired by the buyer within 13 weeks are your responsibility: you must give notice or pay in lieu, and severance pay where it applies. Who ultimately bears these costs between you and the buyer is mainly set by the purchase agreement.
What to do next
- Get statements of account from the CRA for every program and confirm all returns are filed.
- Note whether the debt belongs to the company, to you personally, or both.
- Ask your accountant how much of the sale proceeds would be needed to clear the balances.
- Tell your lawyer about the debt before negotiating, not after the buyer finds it.
- If you cannot pay in full, ask a lawyer or accountant about options with the CRA before you sign anything.
Frequently asked questions
Can I sell my business if I owe the CRA?
Often yes, but the debt becomes part of the negotiation. Buyers usually want to know the balances and may require them to be paid at closing or held back from the price. How the debt affects the sale depends on the structure and facts, so confirm with a lawyer or accountant.
Does the GST/HST election cancel HST I already owe?
The election deals with tax on the property and services supplied under the sale agreement, so that none is payable on them. Tax can still apply to taxable sales of real property where the buyer is not a registrant. How the election relates to HST you already owe for earlier reporting periods depends on your situation, so it is worth confirming with an accountant or lawyer.
Does the buyer have to be GST/HST registered?
If you are a registrant, yes: the recipient must also be a registrant for the section 167(1) election to be made. The election also requires the buyer to acquire all or substantially all of the property needed to carry on the business.
Who pays my employees' severance if the buyer lets some go?
If the buyer ends the employment later, notice, termination pay and severance pay are based on total service with you and the buyer combined, and the buyer owes notice or pay in lieu on that combined service. Where you already paid severance, the buyer may offset that against its later obligations under ESA s. 65(8), para. 3. Staff not hired within 13 weeks are your responsibility. The purchase agreement usually allocates the cost between you and the buyer.
Sources
- Court of Appeal for Ontario, Krishnamoorthy v. Olympus Canada Inc., 2017 ONCA 873 (quoting ESA s. 9(1)) — ontariocourts.ca
- Your guide to the Employment Standards Act – Continuity of employment — ontario.ca
- ESA Policy and Interpretation Manual – Part IV Continuity of employment — ontario.ca
- CRA GST/HST Memorandum 14-4, Sale of a Business or Part of a Business — canada.ca
- Excise Tax Act, s. 167 (Justice Laws) — Justice Laws (federal)
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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