How Is the Purchase Price Allocated in an Ontario Asset Sale?

When you buy or sell a business as an asset deal, the buyer is purchasing specific things: equipment, inventory, goodwill, perhaps land. One total price has to be divided among them. That split is called the purchase price allocation.

It can look like a paperwork detail, but it changes the tax result for both sides. This article explains how the allocation works in Ontario, what tax rules sit behind it, and how it differs from a share sale.

What the allocation is and what the law requires

Where an amount can reasonably be regarded as paid partly for property, partly for services, or for a restrictive covenant, each part is treated as consideration for that item, whatever the contract says. In other words, you cannot simply write any numbers you like into the agreement. The split has to be reasonable.

The buyer is deemed to have acquired each property for the part of the price allocated to it, which sets the buyer's cost base in an asset purchase. The seller's tax result on each item is driven by the same split.

Why the split matters to the seller

If the corporation sells depreciable assets for more than their undepreciated capital cost, the negative balance at year end is included in the corporation's income as recaptured depreciation. That amount is taxed as income, not as a half-taxable capital gain. The taxable capital gain is generally one-half of the gain from disposing of property such as shares or capital assets.

So the more of the price that lands on depreciable equipment above its tax value, the more recapture the seller may face. How the price is divided among items can therefore change the seller's tax bill.

Tax at two levels, and no exemption for the corporation

In an asset sale, the seller corporation pays corporate tax on the sale. Money paid out of the corporation to the owner afterwards is taxed again in the owner's hands.

The lifetime capital gains exemption is a deduction for individuals who sell qualifying shares, and a corporation that sells its own business assets cannot claim it. That is one reason sellers often prefer a share sale, where an individual may be able to use it if the shares qualify.

Non-competes, GST/HST and land

Any part of the price that can reasonably be regarded as paid for a restrictive covenant, such as a non-compete, is treated as an amount the seller received for that covenant. Putting a value on the non-compete is therefore part of the allocation, not a separate side issue.

• GST/HST: if the buyer acquires all or substantially all of the property needed to carry on the business, both sides can jointly elect under Excise Tax Act s. 167 so GST/HST does not apply to the sale. CRA reads that phrase as generally 90% or more. The election is made on Form GST44.
• Registrants: if the seller is a GST/HST registrant, the buyer must also be a registrant for the election to apply.
• Land: a buyer who acquires land or a beneficial interest in land pays Ontario land transfer tax when the transaction closes. Land value in the allocation therefore matters for that tax.

How a share sale differs, and what to do next

In a share purchase, the buyer acquires the corporation itself, so no asset-by-asset allocation is made. The Ministry of Finance says a transfer of shares of a corporation that holds land in its own right does not ordinarily attract land transfer tax, though there are exceptions such as equity co-operatives. The trade-off is that the corporation keeps its history, including some liabilities.

• Ask each side's accountant to model the allocation before you sign the letter of intent.
• List the assets, including equipment, inventory, goodwill, any land and any non-compete.
• Check the undepreciated capital cost of the depreciable assets to see whether recapture is likely.
• Confirm whether the s. 167 GST/HST election is available and who files Form GST44.
• Have a lawyer review the allocation clause so it matches what the tax filings will say.

Frequently asked questions