How Is the Purchase Price Allocated in a BC Asset Sale?

When you buy the assets of a business, you usually agree on one total price. That price still has to be divided among the things you are buying, such as equipment, inventory, receivables, land and goodwill.

The split matters to both sides. It affects the tax each side reports, whether provincial sales tax applies, and what the agreement should say. This article explains the general rules in British Columbia so you can ask better questions of your lawyer and accountant.

This article covers the law of British Columbia.

What allocation means

Allocation is the process of assigning part of the total price to each asset being sold. The agreement of purchase and sale often includes a schedule listing the assets and the amount given to each.

On an asset purchase, the price must be allocated to each asset at fair market value, and the remaining balance is attributed to goodwill. Goodwill is the value of the business beyond its individual assets, such as its reputation and customer base.

Why the split matters for tax

Since January 1, 2017, goodwill is depreciable property in CCA Class 14.1, claimed at 5%. How much of the price lands in goodwill therefore affects the deductions the buyer can claim later.

The allocation should also match what the vendor reports. If the buyer and seller file inconsistent figures, that can invite questions, so the two sides should agree on the numbers before closing and keep support for them.

GST/HST may also be part of the picture. Where a buyer acquires all or substantially all (at least 90%) of the property needed to carry on the business, the buyer and seller may jointly elect on Form GST44 so that no GST/HST is payable on the sale. That election is unavailable where the supplier is a registrant and the recipient is not, and GST/HST can still apply to certain services, leases and licences.

Why the split matters for PST

On a PST asset sale, goodwill, accounts receivable, franchise fees, inventory, real property and shares of a business are non-taxable. Inventory is exempt if the buyer gives a PST number or a Certificate of Exemption – General (FIN 490).

Because some assets are taxable and others are not, there can be a temptation to push value toward goodwill. The parties cannot raise the goodwill price and lower the taxable-asset prices to avoid PST, and the Province may ask for support for asset values.

What to write in the contract

• A schedule listing each asset or asset class and the amount allocated to it.
• A statement that the allocation reflects fair market value.
• A promise by both sides to report the sale consistently with the schedule.
• Whether the buyer will give a PST number or a FIN 490 for inventory.
• Whether the parties will make the GST44 election, and who will file it.
• Which party is responsible for any tax that is later assessed on the allocation.

If the sale includes land, a contract respecting land is generally not enforceable unless there is a signed writing, an act or acquiescence by the party to be held, or reasonable reliance making enforcement necessary to avoid unfairness. Put the land component in writing and signed.

What to do next

• Ask the seller for a list of assets with their current values before you settle the allocation.
• Have your accountant model the tax effect of different splits, using fair market values you can support.
• Raise the allocation early in negotiations, not at closing.
• Have a lawyer review the schedule and the tax clauses in the agreement.
• If you are buying shares instead of assets, ask how the structure changes the analysis.

Frequently asked questions