Avoid Sales Taxes on Business Rollovers
July 21st, 2017
If you plan to incorporate an existing proprietorship (or partnership) you need to be careful to avoid paying more federal and provincial sales tax than necessary.
Generally, if you roll over a proprietorship into a corporation, Canada Revenue Agency (CRA) and provincial tax agencies consider the transaction as a disposal of the proprietorship’s assets. That means you may have to collect and remit both a goods and services tax (GST) and a provincial sales tax (PST). In some instances you may be able to avoid those taxes.
To qualify for this tax break, both the proprietorship and the corporation must fill out and sign an Election Concerning the Acquisition of a Business or Part of a Business (Form GST44). In addition:
1. The property being transferred must constitute a business or part of a business, and
2. The corporation must receive all or substantially all of the property required to carry on the business or part of the business.
If the corporation is registered for GST it must file the form with its GST return. If the business isn’t registered you simply keep the form on file. This election isn’t available when a GST registrant is transferring a business to a non-registrant.
When it comes to PST, however, the process isn’t always as straightforward. Broadly, this is what happens on the provincial level. When a business is sold to another business that is registered for PST, any assets intended for resale, such as inventory, can generally be transferred without worrying about PST. But you generally have to pay PST on the transfer of assets that are used in the business, such as equipment, tools and vehicles. There are two exceptions to this:
1. When the assets are transferred to a related corporation, provided that the transaction occurs before the corporation does any business and that the proprietorship or partnership stops doing business immediately after the exchange.
2. When the transaction is between parent and subsidiary corporations, or between subsidiaries of the same parent, provided that the parent-subsidiary relationship continues for at least eight months.
Failing to correctly structure the asset transfer can result in double taxation, which can add up to a significant cost.
Consult your tax advisor if you are planning to incorporate your proprietorship or partnership or to otherwise transfer assets between related parties.