The election under section 167 of the Excise Tax Act (the ETA) allows an entity to sell a business or part of a business to a recipient without Goods and Services Tax/Harmonized Sales Tax (GST/HST) becoming payable on property or services supplied under the agreement, subject to a number of the requirements being met. The first requirement is that the transfer should apply to the supply of a “business” or “part of a business.” The definition of “business” under the ETA “includes a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement, but does not include an office or employment.”
Any business goes through various stages of growth. For businesses that are involved in exploration and exploitation of natural resources, their start-up phase includes obtaining the correct licences to explore and exploit natural resources, conduct geological and environmental feasibility studies, obtain engineering reports, and other similar activities. For these entities, their only business assets consist of the licences, feasibility studies and engineering reports. The entities would not have other business assets such as customer contracts, equipment, machinery, inventory, etc. However, given that the definition of business “includes a profession, calling, trade, manufacture or undertaking of any kind whatever,” these companies’ calling, trade or undertaking is to obtain licences, conduct feasibility studies and obtain engineering reports at their startup phase. Further, the section 167 election does not limit the application of the election only in circumstances where a business has matured. Thus, the sale of the assets of the business of a start-up natural resources entity (which consist of licences, studies, reports) should qualify for the election under section 167 of the ETA. For the purpose of this question, we are assuming that all other requirements are met.
Question
Please confirm that a start-up business in the natural resources sector can make the section 167 election to sell its business assets, consisting of the assets listed herein. If not, why not?
CRA Comments
To qualify for the election under subsection 167(1) of the Excise Tax Act (ETA), the supplier must be selling a business or part of a business that was established or carried on by the supplier, or that was established or carried on by another person and acquired by the supplier.
Additionally, under the agreement for the supply of the business or part of the business, the recipient must be acquiring ownership, possession or use of all or substantially all of the property (generally 90% or more) that can reasonably be regarded as being necessary for the recipient to be capable of carrying on the business or part as a business.
As indicated in GST/HST Memorandum 14-4, Sale of a Business or Part of a Business, the assets of a business generally include real property, equipment, inventory, and intangibles such as goodwill. In general, the supply of one or more individual assets will not be considered a supply of a business. The nature of a business will generally determine the package of assets that would constitute the supply of a business or part of a business. Generally, there is no one type of property, regardless of its value, that alone would determine that there is a supply of a business. Further discussion on the meaning of business is contained in GST/HST Policy Statement P-167R, Meaning of the First Part of the Definition of Business.
Although we understand that the assets required by a person to operate in the start-up phase of an exploration and exploitation of a natural resource business may be different than those assets required to operate in the mature phase of such a business, or any other business, we would still expect that the start-up phase of a natural resource business would require additional property. For example, the business might also require space in a building (real property) for individuals to perform the work of the business, and other property such as vehicles or computers.
Therefore, in the situation described in your submission, it is not clear whether the sale of licences to explore and exploit a natural resource, geological and environmental feasibility studies, and engineering reports without any other property (e.g., a space to work or equipment) would be considered a sale of a business or part of a business such that, under the agreement for the supply of the business or part of the business, the recipient would be acquiring ownership, possession or use of all or substantially all of the property (generally 90% or more) that can reasonably be regarded as being necessary for the recipient to be capable of carrying on the business or part as a business.
We cannot make a blanket pre-determination on the eligibility for an election under section 167 for all cases involving the situation described in your submission as such eligibility would need to be determined on a case-by-case basis. For each situation, we would need to examine the agreement for sale of the business (or part of the business) and obtain more information about the
particular business, the particular natural resource sector, and the assets that are necessary to carry on that business in that sector. We would then need to determine whether, under the agreement, the recipient is acquiring all or substantially all of the assets that are necessary for the recipient to be capable of carrying on the business in that sector.