ARCHIVED - Sale of Accounts Receivable

What the "Archived Content" notice means for interpretation bulletins

NO: IT-188RSR

DATE: September 26, 1994

SUBJECT: INCOME TAX ACT
Sale of Accounts Receivable

REFERENCE: SPECIAL RELEASE

Application

This Special Release revises Interpretation Bulletin IT-188R, dated May 22, 1984 to describe relevant changes in the Income Tax Act since that bulletin was published and to add interpretative statements. It incorporates the previous changes made to paragraphs 1, 10 and 11 of the bulletin by Special Release dated April 17, 1990 and cancels that earlier release.

The changes to the bulletin given below reflect the stylistic and structural changes contained in the Income Tax Act as revised by the 5th Supplement to the Revised Statutes of Canada, 1985, and by S.C. 1994, c.7 (formerly Bill C-15) both of which came into force on March 1, 1994. This Special Release does not, however, change other paragraphs of the bulletin that may be affected solely by revisions found in the 5th supplement. All such changes will be incorporated into the next full revision of the bulletin.

Bulletin Revisions

1. Paragraph 1 is revised to add interpretative material. Paragraph 1 is replaced with the following:

1. Section 22 is applicable upon election by a vendor and a purchaser, where the vendor (individual, partnership, corporation or estate) sells all or substantially all of the assets of a business that was carried on in Canada to the purchaser who proposes to continue the business. Where 90% of the assets of the business carried on in Canada are sold, all or substantially all of the assets of such business will be considered sold. The business assets sold must include all the accounts receivable of the vendor that are outstanding at the time of the sale. "Accounts receivable" includes the debts arising from loans made in the ordinary course of the business if part of the business was the lending of money. Where a taxpayer has more than one business and sells all or substantially all of the property used in carrying on one of the businesses, section 22 can apply to that sale. See the current version of IT-206, Separate Businesses, for a discussion of whether a taxpayer has more than one business. Whether the purchaser proposes to continue the business is a question of fact. The requirement is not met, for example, if during a corporate reorganization a parent corporation acquires the business and accounts receivable of a subsidiary corporation and, as part of the reorganization, the parent corporation transfers the business and those receivables to a newly incorporated wholly-owned subsidiary corporation which proposes to carry on the particular business. On the other hand, the requirement that the purchaser must propose to continue the business that is acquired is met, for example, if during a corporate reorganization a parent corporation causes the business and accounts receivable of a subsidiary corporation to be transferred directly to a newly incorporated wholly-owned subsidiary corporation which proposes to carry on the particular business. In this example, the newly incorporated wholly-owned subsidiary corporation acquires the business and accounts receivable directly from the subsidiary corporation.

2. Paragraph 7 is revised to clarify when the Department will view the disposition of accounts receivable as being on capital account. Paragraph 7 is revised to read as follows:

7. Where a vendor, who is on the accrual basis and who is not a trader in accounts receivable, sells its accounts receivable along with all or substantially all of the other assets of its business, and the vendor and purchaser do not or cannot file an election under section 22, any loss on the sale will be a capital loss to the vendor. Such a loss is treated in accordance with the provisions of the Act governing capital losses. However, the vendor does have the right to establish that, as of the date of the sale, some of the accounts receivable are bad debts and are deductible as an expense in the year.

Where a purchaser has acquired the accounts receivable along with all or substantially all of the other assets of a business and where section 22 does not apply or an election has not been filed, the purchaser cannot claim deductions under paragraph 20(1)(l) or (p) for the accounts purchased, and any gain or loss on realization of the accounts will be a capital gain or loss to the purchaser unless the purchaser is a trader in accounts receivable. If the purchase is on capital account and any of the purchased accounts receivable is considered uncollectible at the end of a taxation year ending subsequent to the purchase, the purchaser is deemed, by paragraph 50(1)(a), to have disposed of it at that time, giving rise to a capital loss. At the same time, the purchaser is deemed to have reacquired the receivable for nil and any recovery or disposition of the bad debt is included in the computation of capital gains in the year of recovery.

3. Paragraph 10 is revised to delete observations on sections 110.4 and 119 since the observations are no longer relevant.

Paragraph 10 is revised to read as follows:

10. Where a taxpayer who reports income from a farming or fishing business on a cash basis disposes of, or ceases to carry on, all or part of the business, the amount received for the accounts receivable that would have been income is income to the taxpayer in the year of receipt pursuant to subsection 28(5). This is income whether it is received from the sale of a business as a going concern, or from the separate sale or later collection of the accounts receivable.

4. Paragraph 11 is revised to describe subsection 28(4) as a result of a S.C. 1991, c.49 (formerly Bill C-18) amendment. The amendment requires a taxpayer who reports income from a farming or fishing business on a cash basis to include in income an amount for uncollected accounts where at the end of the taxation year the taxpayer is non-resident and does not carry on that business in Canada.

Paragraph 11 is revised to read as follows:

11. A taxpayer who reports income from a farming or fishing business on a cash basis may dispose of, or cease to carry on, the business or part of it before the accounts receivable are fully collected. Where such a taxpayer ceased to reside in Canada or ceased to carry on such a business in Canada after July 13, 1990 and, at the end of the taxation year, is non-resident and does not carry on that business in Canada, anamount for the uncollected accounts must be included in the taxpayer's income by virtue of subsection 28(4). The amount to be included in income is the fair market value of the uncollected accounts that arose from carrying on that business to the extent that those accounts were not otherwise included in calculating the taxpayer's income for the year or a previous taxation year and would have been included in income if the amount had been received by the taxpayer in the year. The conditions that the taxpayer "is non- resident and does not carry on that business in Canada" mean that subsection 28(4) will apply to, for example, a resident of Canada who ceases to carry on a farming business (whether in Canada or beyond its borders) and ceases to reside in Canada or to a non-resident who ceases to carry on a farming business in Canada. The comments in 10 above also apply to all amounts received on collection of the accounts up to and including the year in which the taxpayer ceased to be a resident of Canada.

If you have any comments regarding the matters discussed in this release, please send them to:

Director, Technical Publications Division
Policy and Legislation Branch
Revenue Canada
875 Heron Road
Ottawa, Ontario
K1A 0L8