- When you buy business assets, the total price is usually divided among the assets, and that split affects your tax position.
- CRA says to use the asset prices in the sale agreement if they are set out and reasonable; otherwise price is allocated at fair market value, with any remainder going to goodwill (Class 14.1).
- A joint GST/HST section 167 election can remove GST/HST on the sale, but only if you acquire all or substantially all of the property needed to run the business.
- Buyer and seller each have their own tax interest in the split, so agree it in writing and have an accountant review it before closing.
In an asset purchase, you are not buying a company. You are buying a list of things: equipment, inventory, a lease, customer lists, the name and the goodwill. The agreement sets one total price, but for tax purposes that total has to be divided among the assets you are getting.
That division, called a purchase price allocation, is often treated as a detail left to the end. It should not be. It affects how you claim deductions and how inventory is treated. This article explains the general picture so you can ask better questions of your lawyer and accountant.
What a purchase price allocation is
A purchase price allocation assigns part of the total price to each category of asset. A typical small business sale might include equipment and vehicles, inventory, leasehold improvements, and goodwill, which is the value of the business beyond its physical assets, such as its reputation and customer base.
The allocation matters because different assets are treated differently for tax. Some can be deducted over time, inventory flows through the cost of goods sold, and goodwill has its own class. How the split affects the seller depends on their situation, so it is worth confirming with an accountant.
How CRA says to approach it
For capital cost allowance (CCA), CRA says to use the individual asset prices in the sale agreement if they are set out and reasonable. That is a good reason to put a sensible, defensible breakdown into the agreement rather than leaving it blank.
If the agreement does not set out reasonable prices, CRA says to allocate the price to each asset at fair market value, then to inventory, with any remainder going to goodwill, which is Class 14.1. In other words, goodwill is generally what is left after the identifiable assets have been priced.
CRA also says inventory you acquire should be treated as goods for resale, included in your cost of goods sold. That treatment is different from equipment, which is a capital purchase.
How the allocation compares by asset type
| Asset | How CRA guidance treats it | What to watch |
|---|---|---|
| Equipment and other depreciable assets | Priced using the agreement if reasonable, otherwise fair market value, for CCA purposes | Prices that look unrealistic may be questioned |
| Inventory | Goods for resale, included in cost of goods sold | Value it fairly at closing |
| Goodwill | Remainder after other assets, Class 14.1 | A large goodwill number is not automatically better or worse; it depends on both sides' tax positions |
GST/HST and the section 167 election
The buyer and seller can jointly elect under section 167 of the Excise Tax Act so that no GST/HST is payable on the sale of a business or part of a business. The election is made on Form GST44, which can also be filed online through My Business Account or Represent a Client.
There are conditions. You must acquire all or substantially all (at least 90%) of the property needed to carry on the business, not just individual assets. The election cannot be used if the seller is a GST/HST registrant and the buyer is not.
- Form GST44 must be filed on or before the day your GST/HST return is due for the first reporting period in which GST/HST would otherwise have been payable on the purchase.
- The Minister may allow a later date on application.
- Even with the election, GST/HST still applies to certain services, leases or licences. If the buyer is not a registrant, it also applies to taxable real property sales.
Your accountant can confirm whether your deal qualifies.
What to do next
Raise allocation early, ideally when the offer or letter of intent is being negotiated, not on the night before closing. A schedule attached to the purchase agreement is the usual place to record it.
- Ask for a list of assets with proposed values, and compare it to what the assets are really worth.
- Have your accountant model the allocation from your side, and ask what the seller's position is likely to be.
- Confirm whether you will acquire all or substantially all of the business property, and whether you and the seller will make the GST44 election.
- Note the filing deadline for Form GST44 and who is responsible for filing it.
- After closing, update your CRA GST/HST owner information and check whether you need a new business number or payroll account.
A lawyer can build the allocation schedule into the agreement, and an accountant can confirm the tax effects, including how they apply to the seller. Both are worth involving before you sign.
Frequently asked questions
Who decides how the price is split?
The buyer and seller usually negotiate it and record it in the purchase agreement. CRA says to use the individual asset prices in the agreement if they are set out and reasonable. If they are not, the price is allocated at fair market value.
What happens to goodwill in the allocation?
Under CRA's guidance, after the price is allocated to each asset at fair market value and then to inventory, any remainder goes to goodwill, which is Class 14.1. Goodwill is therefore often the balancing figure.
Do I always pay GST/HST when I buy a business?
Not necessarily. Buyer and seller can jointly elect under section 167 so no GST/HST is payable on the sale, if the conditions are met, including acquiring all or substantially all of the property needed to run the business. Some items, such as certain services, leases or licences, can still attract GST/HST.
What if we miss the GST44 filing date?
The form is generally due by the day your GST/HST return is due for the first reporting period in which tax would otherwise have been payable. The Minister may allow a later date on application, so speak to your accountant or lawyer promptly.
Sources
- CRA – Buying a business — canada.ca
- CRA – Buying a business (business registration) — canada.ca
- Justice Laws – Excise Tax Act s. 167 — Justice Laws (federal)
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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