Negotiating Asset Allocation Before Signing a Business Sale

The situation

Ayesha had spent nineteen years building a small portfolio through a corporation she owned and operated: two commercial buildings in Peterborough, leased mainly to a mix of local offices and service tenants. Her spouse, Rivka, a specialist physician, held a minority class of shares in the corporation as well, arranged years earlier on their accountant's advice to split investment income between them. Rivka had never been involved in running the buildings — leasing, maintenance, and tenant relations were entirely Ayesha's work — but as a shareholder her tax position was affected by anything that happened inside the corporation.

After nearly two decades, Ayesha decided to sell. A buyer came together quickly: a real estate investment group whose principal, Shira, made an offer for both buildings and the tenant lease book within a few weeks of the properties being quietly shown to a short list of investors. The parties agreed on a total price of roughly $3,400,000 for the corporation's operating assets — the buildings, the equipment and fixtures used to run them, and the goodwill built up in the tenant relationships and lease renewals over the years. Both sides wanted to move quickly, and Shira's team sent over a draft purchase agreement within days, hoping to have it signed before the end of the month.

What the draft agreement missed

Ayesha brought the draft agreement to Treadstone Law for a pre-signing review, expecting a routine check of the closing mechanics. What our team found in the schedule attached to the agreement was more consequential: the purchase price allocation clause.

When a corporation sells its business as an asset sale — as opposed to selling the shares of the corporation itself — the purchase agreement has to divide the total price among the individual assets being transferred: land, buildings, equipment and fixtures, and goodwill. That allocation is not a formality. Under the Income Tax Act, each category of asset is taxed differently when it is sold, and the allocation the parties agree to in the contract is generally the figure both sides are expected to use when they file their tax returns.

Over her nineteen years of ownership, Ayesha's corporation had claimed substantial capital cost allowance on the two buildings — the annual tax deduction available for the gradual wear and depreciation of income-producing property. Each year's deduction had lowered the buildings' undepreciated capital cost, which is the tax-basis figure used to measure gain or loss on a later sale. When a depreciable property sells for more than its undepreciated capital cost, the difference up to the amount of allowance previously claimed is treated as recapture — added back to income and taxed at full ordinary rates, not at the more favourable rate that applies to capital gains.

The draft agreement allocated roughly $2,300,000 of the $3,400,000 price to the two buildings, with the remainder split between equipment, fixtures, and goodwill. Because the buildings' undepreciated capital cost had fallen so far over nineteen years of claimed depreciation, allocating that much value to the buildings meant approximately $650,000 of the gain on them would come back as recapture, taxed in full, rather than being treated as a capital gain eligible for the lower inclusion rate. Land itself is not depreciable property, so nothing allocated to land can ever trigger recapture — but the draft schedule had folded almost all of the real estate value into the building category rather than splitting out the underlying land, which pushed far more of the price into the recapture-exposed category than the economics of the deal required.

It was a workable allocation for the buyer. A purchaser generally prefers value allocated toward depreciable property, including goodwill, because it becomes the buyer's new cost base for future capital cost allowance claims — the higher the buyer's allocated cost, the larger the deductions available going forward. The buyer's team had drafted an allocation that served that interest well. Nothing in it was improper, but nobody had proposed a schedule that also served Ayesha's interest, and left unchallenged it would have been treated as agreed once both sides signed.

What we did

1. Modelled the tax cost of the draft allocation before responding to the buyer. Working with figures from the corporation's accountant on the buildings' undepreciated capital cost, we calculated that the draft schedule would generate roughly $650,000 in recapture income taxed at full rates, on top of whatever capital gain the sale produced — a materially worse outcome than an allocation that respected the actual split between land value, building value, and goodwill.
2. Prepared an alternative allocation schedule grounded in appraised values. Rather than simply asking for a better number, we arranged for the buildings to be separately appraised for land and building value, and worked with the accountant to propose a schedule that allocated a larger share of the price to land — which carries no recapture risk at all — and to goodwill, while still leaving the buyer with a reasonable depreciable basis in the buildings and equipment going forward.
3. Negotiated directly with the buyer's team on the allocation clause, separately from price. Because the total $3,400,000 price was not in dispute, the negotiation stayed narrow and practical: how that fixed total was divided among categories. We explained to Shira's team that an allocation more favourable to the seller's tax position on the buildings would not cost the buyer meaningfully more in future deductions, since goodwill and equipment remained depreciable to the buyer either way — it simply moved value between categories that mattered more to one side than the other.
4. Built the agreed allocation into the closing schedule as a binding term. Once the parties reached a revised split, we had it written into the purchase agreement itself, with both parties' accountants confirming in writing that they would file consistently with it — closing off any later dispute with tax authorities about which figures applied.
5. Coordinated the closing with Ayesha's and Rivka's accountant to plan for the resulting tax liability. Even with a far better allocation, a sale of this size still produced a significant tax bill; the goal throughout was minimizing that bill within the bounds of a fair negotiation, not eliminating it, and Ayesha's corporation set aside funds from closing to cover the amount owing.

The outcome

The revised allocation reduced the buildings' share of the price by shifting roughly $650,000 into land and goodwill categories that were not exposed to recapture, cutting the recapture-taxed portion of the sale substantially compared with the buyer's original draft. Combined with the more favourable tax treatment of capital gains, the change was projected to save the corporation, and ultimately Ayesha and Rivka as shareholders, roughly $150,000 to $200,000 in tax compared with signing the agreement as first drafted.

The sale closed on the buyer's original timeline, only about ten days later than first proposed — the allocation negotiation added time, but not enough to put the deal at risk. Shira's group took possession of both buildings with a depreciable cost base that still supported reasonable future deductions, so the change cost the buyer little in practical terms while meaningfully improving Ayesha's result. Both sides' accountants filed consistently with the agreed schedule, which meant neither the corporation nor the buyer faced a later reassessment dispute over which figures should have applied.

For Ayesha, the lesson was less about the specific numbers than about the moment they were caught. Had the draft agreement been signed as received, the allocation would have been binding, and revisiting it afterward — with tax authorities on notice of one set of figures — would have been far harder, if not practically impossible. Catching the issue before signature, while the schedule was still a proposal rather than a term, was what made the renegotiation possible at all.

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