How is goodwill valued and taxed when selling an Ontario business?

Goodwill is the value of a business beyond its tangible assets — customer relationships, reputation, brand, know-how, and the expectation of continued profit. In an Ontario business sale, goodwill is typically valued by estimating what portion of the purchase price cannot be attributed to identifiable assets.

For buyers in an asset purchase, goodwill is an eligible capital expenditure under federal tax rules (now subject to the cumulative eligible capital pool rules). For sellers, the proceeds attributable to goodwill are generally treated as a capital gain, half of which is included in income — a considerably more favourable treatment than if the proceeds were business income. For qualifying small business shares (not goodwill per se, but often linked to share sale discussions), the lifetime capital gains exemption may shelter a significant portion of the gain.

Tax treatment of goodwill is an important reason why sellers often prefer share sales over asset sales. Federal and provincial income tax rules are complex and change periodically; a tax lawyer or accountant should model the specific transaction before you commit to a structure.