When should the buyer and seller of a business file a section 22 election on the accounts receivable?
File a section 22 election on Form T2022 when your client sells all or substantially all of a business (at least 90% of its property, per CRA), including every outstanding receivable, to a buyer who will continue it. The seller deducts the receivables discount as a business loss and the buyer includes it. Without the election, the loss is capital.
When does a section 22 election apply to a business sale?
Subsection 22(1) applies when a person who carried on a business sells all or substantially all the property used in it, including the outstanding receivables already included in income, to a purchaser who proposes to continue that business, and both sign the election in prescribed form laws-lois.justice.gc.ca. Every condition has to hold.
| Condition | What CRA looks for | Fails when |
|---|---|---|
| All or substantially all the business property is sold | At least 90% of the property used in the business | Your client keeps a big block of assets, or sells only the receivables |
| Every outstanding receivable goes with it | All receivables at the sale date, plus ordinary course loans for a lender | Some receivables are kept back or collected separately |
| The buyer proposes to continue the business | A question of fact | The buyer plans to wind the business down |
| Both parties sign Form T2022 | Joint election stating the price paid for the debts | Only one side signs |
| It is a sale | A sale between two parties | Receivables pass to a parent on a section 88 wind up |
CRA reads "all or substantially all" as at least 90% of the property, and confirms that a vendor with several businesses can use section 22 on the sale of just one of them canada.ca. The 90% figure and the "sale" requirement come from CRA's archived bulletin IT-188R, which CRA still keeps available for reference
canada.ca.
What does the election change for the seller and the buyer?
The seller deducts the difference between the face value of the debts sold and the price the buyer paid for them, and the buyer includes exactly that difference in income laws-lois.justice.gc.ca. Debts the seller already wrote off as bad under paragraph 20(1)(p) stay out of the face value.
After the election, the buyer treats the debts as if they had been in its own income. It can claim a reserve for doubtful debts under paragraph 20(1)(l) and deduct bad debts under 20(1)(p), but not on a debt the seller already deducted laws-lois.justice.gc.ca. If the buyer later collects a debt the seller wrote off, paragraph 22(1)(d) treats the seller's deduction as the buyer's, so the recovery goes into the buyer's income under 12(1)(i).
The stated price binds both parties, subject to subsection 69(1) laws-lois.justice.gc.ca. CRA's position is that it cannot be changed later by the parties but can be questioned on assessment, and if the parties do not deal at arm's length and the price differs from fair market value, 69(1) adjusts it
canada.ca. If the sale agreement does not split the price, make a reasonable allocation to the receivables.
Worked example: the election turns a $7,500 capital loss into a $15,000 deduction
Your client's corporation sells its distribution business to an arm's length buyer who will keep running it. The receivables have a face value of $200,000 (after $5,000 already written off as bad), and the agreement allocates $185,000 of the price to them. Last year the seller deducted a $12,000 reserve for doubtful debts.
| Line | With the section 22 election | Without the election |
|---|---|---|
| Face value minus price | $15,000 | $15,000 |
| Seller deducts from business income | $15,000 | $0 |
| Seller's capital loss | $0 | $15,000 |
| Allowable capital loss (half) | $0 | $7,500, only against taxable capital gains |
| Last year's $12,000 reserve added back | $12,000 | $12,000 |
| Seller's net effect on income | $3,000 deduction | $12,000 inclusion, plus a $7,500 allowable capital loss |
| Buyer includes in income | $15,000 | $0 |
| Buyer can claim a doubtful debt reserve and bad debts | Yes | No |
The $12,000 comes back either way: paragraph 12(1)(d) adds last year's 20(1)(l) reserve to income laws-lois.justice.gc.ca, and CRA's view is that no new reserve is available at year end because the debts are no longer owed to the seller
canada.ca. The election turns the $15,000 into a full business deduction instead of a $7,500 allowable capital loss, since only half of a capital loss is allowable
laws-lois.justice.gc.ca.
What happens to the receivables without the election?
The seller's loss on the receivables is a capital loss, unless the seller is a trader in receivables. The seller can still show that particular accounts were already bad at the sale date and deduct those as bad debts canada.ca. Only half of that loss is allowable, and it offsets taxable capital gains, not business income; see the capital gains inclusion rate page for the 50% rate.
The buyer gets no reserve and no bad debt deduction on purchased accounts. Any gain or loss on collection is capital for the buyer, and an account that goes bad is deemed disposed of at the end of the year by paragraph 50(1)(a), producing a capital loss canada.ca. That is the buyer's reason to sign: without the election it has no 20(1)(l) reserve on the accounts it just bought.
Who signs T2022, where does it go, and when is it due?
Form T2022, Election in Respect of the Sale of Debts Receivable, is signed by the individual, designated partner or authorized officer for each side. For a partnership, a designated partner signs and you attach a list of all members with their names, addresses and SIN, BN or trust account numbers. Mail two completed copies to the tax centre of the seller or the buyer for the tax year that includes the sale date canada.ca. The form lives on the CRA forms page
canada.ca.
Section 22 itself sets no filing deadline laws-lois.justice.gc.ca. CRA's bulletin says the election should be filed with the return for the year of sale
canada.ca, so the safe course is to file it by the earlier of the two parties' filing due dates for that year. The form asks for the face value of the debts (excluding those already written off), the price paid and the difference.
Can you use section 22 with a section 85 rollover?
Not on the same receivables. CRA's position is that rolling the receivables under section 85 rules out a section 22 election on them, but nothing stops the seller from selling the receivables under section 22 first and then rolling the rest of the assets canada.ca. See the section 85 rollover page for the T2057 side of that plan. Rolling receivables under section 97 into a partnership also generally rules out section 22.
A bad debt the seller wrote off can't be deducted again by the buyer, and the reserve rules for doubtful debts sit in paragraph 20(1)(l) laws-lois.justice.gc.ca. CRA's bulletin on bad debts explains how section 22 fits next to them
canada.ca.
Sources
Is section 22 worth filing if the receivables are sold at face value?
Usually not for tax dollars, because the difference is zero, so the seller has nothing to deduct and the buyer nothing to include. The buyer still gets the right to claim a 20(1)(l) reserve and 20(1)(p) bad debts on those accounts laws-lois.justice.gc.ca, which matters if some accounts later sour.
Does section 22 work on a share sale?
No. On a share sale the corporation keeps its own receivables, so nothing is sold and there is no purchaser of the business property. Section 22 is for asset sales of the business.
What about a cash basis farmer or fisher?
Section 22 doesn't fit them. CRA says the amount a cash basis farming or fishing business receives for its receivables is income in the year received under subsection 28(5), whether the receivables go with the business or are collected later canada.ca.
Can the parties change the price on T2022 after filing?
No. CRA treats the stated price as final for the seller and the buyer, though it can challenge it on assessment if it does not match the facts canada.ca.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.