What is goodwill and how is it paid for when buying a business in BC?

This answer covers the law of British Columbia.

Goodwill is the value of a business beyond its physical assets, such as its customer relationships, reputation, location and ability to keep earning. It is often a large part of the price because a buyer is paying for what the business can earn, not just the equipment and inventory it owns. Valuation usually looks at past earnings and risk, and the final figure is negotiated, so an accountant's view helps.

How goodwill is taxed and paid depends on the structure. In an asset sale, PST applies to taxable assets such as affixed machinery, equipment, computer hardware and supplies, but not to goodwill, inventory, accounts receivable or real property. PST does not apply to the sale of shares. Not all proceeds are capital gains, because recapture of capital cost allowance must be included in income when the undepreciated capital cost balance is negative.

If the seller is paid over time, a capital gains reserve can spread the gain, and most reserves run over a maximum of four years. The lifetime capital gains exemption is for individuals disposing of qualified shares and does not apply where a corporation sells its own assets. How the price is split in the agreement matters, so confirm it with a lawyer or accountant.