M&A: The Subsection 20(24) Election

In a business acquisition transaction, it is not uncommon to find an assumption by the purchaser of the obligations of the vendor to deliver goods or perform services in the future for which the vendor has already received payment. In such a scenario, there are two possible outcomes from a tax perspective, as set out below:

No election made under subsection 20(24) of the Income Tax Act

Typically the purchaser would treat the assumed obligation as part of the consideration for the purchase of the business. Where no election is made, the purchaser would not be able to deduct expenses required to fulfill the obligations since the expenses would relate to the acquisition of a capital asset. The vendor would include in its income the payment it receives from its customers but no deduction would be allowed to the vendor since no expenses would have been incurred to fulfill the obligations.