Two tax clauses that
quietly move real money
In an Ontario asset deal, two issues get decided by a few paragraphs most people skim: whether HST applies to the sale at all, and how the price gets split between inventory, equipment, goodwill and any non-compete. Get either one wrong and you're looking at an unexpected 13% cash call at closing, or a CRA reassessment years later. This guide explains the section 167 election and the section 68 allocation rules in plain language.
By Jonathan Kleiman, Barrister & Solicitor · Published August 2026
When people negotiate the sale of a business, nearly all the energy goes into the price. Almost none goes into two questions that decide how much of that price actually changes hands and stays put: does HST apply to this deal, and how is the price allocated across what's being sold. Both get resolved by short clauses in the agreement of purchase and sale, and both are easy to get wrong in ways nobody notices at signing.
These issues live almost entirely in asset deals, where the corporation sells its inventory, equipment, contracts and goodwill rather than the owner selling shares. If you haven't settled that structure question yet, start with my guide to asset purchase vs. share purchase in Ontario, because the structure decides whether this article's problems even exist for you.
This article is general information, not legal or tax advice. HST and purchase price allocation are technical, fact-specific areas where the details of your deal change the answer. Get advice from a corporate lawyer and an accountant before you sign an agreement of purchase and sale, not after.
Do you pay HST when you buy a business in Ontario?
By default, yes: selling the assets of a business is a taxable supply under the federal Excise Tax Act, so absent an election the vendor must charge 13% HST on most of the purchase price and the purchaser must fund it at closing. The Act doesn't carve business sales out of the normal rules. Selling a delivery van to a customer and selling the same van as part of selling the whole courier business are both taxable supplies.
Now, a registrant purchaser using the assets in a commercial activity can generally claim that HST back as an input tax credit. So on paper the tax washes out. In practice it's still a real problem: the purchaser has to find the cash at closing, often 13% on top of a price it already stretched to pay, then wait to recover it through its HST return. On a $1 million deal that's $130,000 of financing for nothing. And if anything about the paperwork or registration status is off, the "temporary" tax can become a permanent fight.
That cash-flow problem is exactly what the section 167 election exists to solve.
What is the section 167 election?
Under subsection 167(1) of the Excise Tax Act, the vendor and purchaser of a business, or part of a business, can jointly elect so that no GST/HST is payable on the property and services supplied under the purchase agreement. Where the election validly applies, neither side has to come up with HST money at closing, and the purchaser doesn't have to carry the tax while waiting for an input tax credit. It's the standard move in Ontario asset deals between registrants, and most well-drafted asset purchase agreements build it in as a matter of course.
Who qualifies for the section 167 election?
The conditions come straight from the statute, and each one has caught real deals:
- A business, or part of a business. The vendor must be supplying a business (or a functionally distinct part of one) that it established, carried on, or itself acquired from someone else. A grab-bag of assets that never operated as a business doesn't qualify.
- All or substantially all of the necessary property. Under the agreement, the purchaser must acquire ownership, possession or use of all or substantially all of the property that can reasonably be regarded as necessary for it to be capable of carrying on the business or part as a business. The CRA's long-standing administrative rule of thumb reads "substantially all" as 90% or more, though the statute itself states no percentage.
- Registration status lines up. The election isn't available where the vendor is a registrant and the purchaser is not. So if the vendor is registered for GST/HST, which is nearly always, the purchaser must be registered too, and should be registered effective on or before closing. (Where the vendor isn't a registrant, the election can be made even with a non-registrant purchaser.)
- The election is documented. The parties record the joint election on Form GST44, and where the purchaser is a registrant, it must actually be filed with the CRA. An election both sides "agreed to" but nobody filed is how these arrangements fall apart.
The registration point deserves its own sentence, because it's the one that blows up closings: a purchaser incorporated last week has no GST/HST registration until someone applies for one. Confirm the purchaser's registration, or get the application moving, at the letter of intent stage rather than discovering the gap during closing preparations.
Who files Form GST44, and when is it due?
The purchaser files Form GST44, and the deadline is the due date of the purchaser's GST/HST return for the first reporting period in which tax would otherwise have become payable on the sale, not a fixed number of days after closing. This is where deals get tripped up. Both parties sign the joint election, but the filing obligation and the deadline belong to the purchaser alone, and the deadline moves with the purchaser's own reporting cycle: monthly filers have weeks, annual filers may have many months. The CRA has discretion to accept a late-filed election on application, but discretionary mercy isn't a plan.
If no valid election is in place, the default rule revives: the vendor was supposed to charge and remit HST, and the CRA can assess the vendor for tax it never collected, plus interest. That's why the vendor should care about the purchaser's filing even though it isn't the vendor's job. The fix is drafting, not hope: the purchase agreement should name who prepares and files the GST44, set a deadline, include the purchaser's representation that it's a registrant, and add a covenant that both parties will sign whatever's needed to complete and file the election.
What does the section 167 election not cover?
Even where the election validly applies to the sale, the Excise Tax Act keeps three things taxable: services the vendor is to render, property supplied by lease or licence, and a sale of real property where the purchaser is not a registrant. In practice, the carve-outs look like this:
- Post-closing services from the vendor. Transition assistance, consulting during a handover period, training the new owner. If the vendor is being paid to keep working, that service piece stays taxable.
- Leased or licensed property. Equipment the purchaser will lease from the vendor rather than buy, or software and intellectual property made available under licence rather than assigned outright.
- Real property sold to a non-registrant. Where the deal includes land or a building and the purchaser isn't a registrant, HST applies to the real property piece even with the election in place.
Where a carve-out applies, the vendor is treated as making a separate supply of that piece, and HST is charged on the value reasonably attributable to it. So a deal that combines an asset sale with, say, a transition services agreement needs its own line in the price allocation for the taxable piece. That way HST lands on the right number without infecting the rest of the deal. The same discipline applies where the business premises are rented and the lease is being assigned; the mechanics of that piece are covered in my guide to assigning a commercial lease in a business sale.
Do you charge HST on a share sale?
No: shares are financial instruments, and selling them is an exempt supply for GST/HST purposes, so no HST is charged on the share price. This is worth pausing on, because it means the entire HST discussion above is really an asset-deal problem. In a share deal the corporation keeps owning its assets and only the ownership of the corporation changes hands, so there's no taxable supply of the underlying business property at all. It's one more entry on the long list of ways the asset-versus-share decision drives everything downstream, alongside liability, employees, and the seller's access to the lifetime capital gains exemption.
What is purchase price allocation, and why does it matter?
Purchase price allocation is the division of the total price among the categories of property being sold, and it matters because each category is taxed differently, so the split directly sets the vendor's tax bill and the purchaser's future deductions. Once HST is sorted, this is the second tax negotiation hiding in an asset deal. The same $1 million price produces very different after-tax results depending on how much of it is inventory, how much is equipment, how much is goodwill, and how much (if anything) is paid for a non-compete.
The parties' interests naturally pull in opposite directions:
What the seller usually wants
- More to goodwill. A gain on goodwill is generally taxed as a capital gain, only half of which is taxable. For sellers, that's usually the best result available in an asset deal.
- Less to depreciable equipment. Selling equipment for more than its undepreciated capital cost triggers recapture: the CRA claws back capital cost allowance the seller deducted in earlier years, and recapture is fully taxable as income.
- Nothing separately to a non-compete. As explained below, an amount allocated to a restrictive covenant defaults to fully taxable ordinary income in the seller's hands.
What the buyer usually wants
- More to inventory and equipment. Inventory becomes deductible cost of goods sold, and equipment starts generating capital cost allowance deductions at that class's normal rate right away.
- Less to goodwill. Purchased goodwill goes into Class 14.1, which depreciates at only 5% a year on a declining balance. A dollar allocated to goodwill takes far longer to turn into deductions than a dollar allocated to equipment.
Here's the part that matters for what comes next: because the interests genuinely conflict, an allocation that two arm's-length parties actually fought over tends to reflect real economic bargaining rather than a number picked to game the tax system. That turns out to be the best protection either side has if the CRA later comes asking.
Can the CRA change the purchase price allocation?
Yes: section 68 of the Income Tax Act lets the CRA reallocate the price where the parties' split can't reasonably be regarded as reflecting what was actually paid for each item, regardless of what the agreement says. Section 68 deems whatever portion of the price can reasonably be regarded as consideration for a particular property, for services, or for a restrictive covenant to be the proceeds of disposition for that specific item. In other words, writing a number in the agreement doesn't make it the tax answer; it has to be a reasonable number.
The leading case is TransAlta Corporation v. Canada, 2012 FCA 20, where the Federal Court of Appeal held that the question isn't whether the CRA (or a court) would have allocated the price differently. It's whether a reasonable business person, with business considerations in mind, would have made that allocation. A few practical things follow from that standard:
- Genuine negotiation is your best evidence. An allocation hammered out between arm's-length parties with opposing tax interests carries real weight, precisely because neither side had a reason to accept a number that only helped the other.
- Indifference weakens it. Where one party didn't care how the price was split, or the parties' interests happened to align, the allocation gets less deference. There's no assurance a number nobody contested reflects real value.
- Industry practice counts. An allocation consistent with how valuators, regulators or the industry ordinarily treat similar deals supports reasonableness. In TransAlta itself, long-standing industry and regulatory practice helped sustain a large goodwill allocation.
- Non-arm's-length deals get scrutiny. Section 68 applies to related-party sales too, and a sale between family members or related corporations gets far less benefit of the doubt, because nothing forced the number to be honest.
The takeaway isn't that the CRA reassesses every deal. It's that the defensibility of your allocation is built, or lost, at the negotiation table. A schedule both sides actually pushed back and forth on, supported by a valuation where the numbers are large, is very hard to displace. A split copied from a precedent because nobody wanted to think about it is not.
How is a non-compete payment taxed?
Badly, by default: under section 56.4 of the Income Tax Act, an amount received for a restrictive covenant is fully taxable as ordinary income, with no capital gains treatment, unless a specific exception or joint election applies. Restrictive covenants got their own regime after courts let sellers take non-compete payments tax-free in the early 2000s, and Parliament responded with a hard default: full income inclusion. Section 68 then backs this up by letting the CRA allocate a reasonable amount to the covenant even where the parties allocated nothing. Section 56.4 does contain relief, but it's narrow and specific: amounts already taxed as employment income, a joint election to treat the covenant amount as part of the goodwill proceeds, and, only where the covenant is granted as part of selling shares or a partnership interest, a joint election to fold it into the proceeds of that sale. In a pure asset deal, that last route isn't available; the goodwill election is the one potentially on the table. There are also relieving rules for certain arm's-length deals where no separate proceeds are paid for the covenant, each with its own conditions.
The conditions for those exceptions and elections are genuinely technical, and this is a place to get tax advice on your specific deal rather than rely on a blog post, mine included. The drafting point, though, is simple: if your deal has a non-compete, decide deliberately how it's being treated, paper it, and make the required elections on time. Nearly every business sale includes one, and for what the covenant itself must look like to be enforceable, see my guide to non-competes when buying or selling a business.
What should your purchase agreement actually say?
Everything above lands in a handful of drafting decisions: an explicit allocation schedule, an assigned GST44 obligation, confirmed registration status, and carve-outs for anything the section 167 election doesn't reach. Here's the practical checklist I work through on the tax clauses of an Ontario asset deal:
- Include a real allocation schedule. Set out how the price splits across inventory, equipment (by class), goodwill, and any restrictive covenant. That schedule is your primary evidence if the CRA questions the allocation years later, and both parties should report consistently with it.
- Negotiate the allocation; don't inherit it. Because the section 68 standard rewards genuine bargaining, an allocation both sides actually contested is far more defensible than one copied from a template. Where the numbers are large, a valuation supporting the goodwill figure is cheap insurance; my guide on valuing a small business covers where those numbers come from.
- Confirm GST/HST registration at the LOI stage. The purchaser's registration is a condition of the election whenever the vendor is a registrant. A newly incorporated purchaser needs to apply, and the agreement should include a registration representation.
- Assign the GST44 explicitly. Name who prepares and files it, set the deadline, and covenant mutual cooperation. The purchaser owns the legal obligation; the agreement should make sure someone owns the task.
- Carve out what the election doesn't cover. Transition services, leased or licensed property, and real property going to a non-registrant each need their own allocation line and their own HST treatment.
- Price the non-compete deliberately. Section 56.4's default is ugly, and both section 68 and the CRA are alive to covenants used as an afterthought. Decide the treatment, paper it, and file any joint elections on time.
None of this changes the headline price. All of it changes what each side keeps, which is the number that actually matters.
Frequently asked questions
Do you have to pay HST when you buy a business in Ontario?
By default, yes. Selling the assets of a business is a taxable supply under the Excise Tax Act, so the vendor would normally charge 13% HST on most of the purchase price and the purchaser would fund it at closing. But where the conditions are met, the vendor and purchaser can jointly elect under section 167 so that no HST is payable on the sale. Most Ontario asset deals between registrants use this election. A share sale is different: shares are financial instruments, so no HST applies to the share price in the first place.
What is a section 167 election?
It is a joint election under subsection 167(1) of the Excise Tax Act that lets the vendor and purchaser of a business, or part of a business, agree that no GST/HST is payable on the sale. The purchaser must be acquiring all or substantially all of the property reasonably necessary to carry on the business, and where the vendor is a GST/HST registrant the purchaser must be a registrant too. The election is recorded on Form GST44, which the purchaser files with the CRA.
Who files Form GST44, the buyer or the seller?
The purchaser. Where the purchaser is a registrant, it must file Form GST44 with the CRA by the due date of its GST/HST return for the first reporting period in which tax would otherwise have become payable on the sale. The vendor signs the joint election, but the filing obligation and the deadline belong to the purchaser, which is why a well-drafted purchase agreement assigns that job explicitly.
What happens if the GST44 is filed late or not at all?
If a valid election is not in place, the default rule applies: the vendor was required to charge and remit HST on the sale, and the CRA can assess the vendor for the uncollected tax, plus interest. The CRA has discretion to accept a late-filed election on application, but that is a request for administrative mercy, not a right. The practical answer is to make the filing a closing deliverable with a named responsible party.
Does the section 167 election cover everything in the deal?
No. Even where the election applies, HST is still payable on a taxable supply of services the vendor will render (like post-closing transition services), on property supplied by lease or licence rather than sold outright, and on a sale of real property where the purchaser is not a registrant. Those pieces need their own price allocation so HST is charged on the right amount.
Do you charge HST on the sale of shares of a company?
No. Shares are financial instruments, and the sale of a financial instrument is an exempt supply for GST/HST purposes. That is one of several reasons the asset-versus-share structure decision has to come first: in a share deal the HST question largely disappears, while in an asset deal it has to be managed with the section 167 election.
What is purchase price allocation in a business sale?
It is the division of the total purchase price among the different things being sold: inventory, equipment and other depreciable property, goodwill, and sometimes a restrictive covenant like a non-compete. Each category is taxed differently, so the allocation directly determines the vendor’s tax on the sale and the purchaser’s future deductions. It belongs in a schedule to the purchase agreement, negotiated like any other term.
Can the CRA change the purchase price allocation in my agreement?
Yes. Section 68 of the Income Tax Act lets the CRA reallocate the price where the parties’ allocation cannot reasonably be regarded as reflecting what was really paid for each item. The Federal Court of Appeal’s test asks whether a reasonable business person, with business considerations in mind, would have made that allocation. An allocation genuinely negotiated between arm’s-length parties with opposing tax interests is hard to displace; a number one side inserted without any pushback gets much less deference.
How is a payment for a non-compete taxed?
Under section 56.4 of the Income Tax Act, an amount received for a restrictive covenant is, by default, fully taxable as ordinary income, not as a capital gain. Narrow exceptions and joint elections can produce better treatment, such as folding the covenant amount into goodwill proceeds, or into share proceeds where the covenant is part of a share sale, but the conditions are technical, some routes are not available in a pure asset deal, and the paperwork matters. Any deal that includes a non-compete should get tax advice on section 56.4 before the allocation is signed.
Final thoughts
HST and purchase price allocation are the two places in an asset deal where tax quietly moves real money without touching the headline price. The section 167 election is routine when it's planned, and a genuine problem when it's improvised: registration status checked late, a GST44 nobody filed, a transition services agreement nobody carved out. And the allocation schedule is either your best evidence or your biggest exposure, depending entirely on whether it was actually negotiated.
I act for buyers and sellers on the legal side of Ontario business sales, working alongside your accountant so the agreement actually delivers the tax result the deal assumed. If you're buying a business or selling one, these clauses are worth getting right the first time.
Buying or selling a business?
If you want the tax clauses of your purchase agreement done properly, from the section 167 election to a defensible allocation schedule, I can handle the legal side and coordinate with your accountant. Book a free 30-minute consultation.