Why does a commercial purchase agreement allocate the price between land, building, and goodwill?

When a commercial deal involves more than just bare land, such as a building, and sometimes an operating business's goodwill, the purchase agreement typically allocates the total price across these categories because each is treated differently for tax purposes. Land generally isn't depreciable, while a building is, so how much of the price is allocated to the building affects the buyer's ability to claim depreciation, or capital cost allowance, going forward. Goodwill and other intangible business assets are treated differently again under federal income tax rules.

This allocation also matters for HST, since land, buildings, and business assets like goodwill can attract different HST treatment depending on the nature of the transaction and the parties involved, making a clear breakdown important for both parties' tax filings rather than just an administrative afterthought.

Because the buyer and seller often have opposing tax incentives, a seller may prefer more of the price allocated to goodwill or land depending on their own tax position, while a buyer often wants more allocated to depreciable building value, this allocation is genuinely negotiated as part of the deal, not a mechanical afterthought, and should be settled with tax advice before the agreement is finalized.