Buying a Competitor's Shop: Splitting the Price, Saving the HST

The situation

Alejandro drove a bus for a living, and for the past six years he had also run a small phone and laptop repair shop in Markham on his days off, with a part-time employee covering the counter during his shifts. Two kilometres away, a very similar shop had been built up over a decade by Ming and Liang, a couple who ran it together — Liang worked the shop most days, and Ming kept her job as a hotel front-desk supervisor and helped with the books on weekends. When Ming and Liang decided it was time to sell, Alejandro was the obvious buyer. He knew the business, the equipment, and most of the regular customers by reputation, and buying the shop outright meant folding a second location into what he already ran rather than building one from nothing.

The three of them agreed on a purchase price of roughly $460,000 for the shop's assets — not the corporation that owned it, but the equipment, inventory, leasehold improvements to the rented unit, and the goodwill of the business itself, sold as what is generally called an asset purchase. They came to us with that number settled and asked for help turning a handshake into a signed agreement. What neither side had thought through yet was that a single purchase price is not the end of the negotiation. It has to be divided among the different categories of assets being sold, and how it gets divided changes what each side owes in tax — sometimes by a meaningful amount, on a deal this size.

The tax problem hiding inside the price

Two separate issues needed attention before this deal could close cleanly, and both traced back to how the Excise Tax Act — the federal statute that governs HST — treats the sale of a business.

The first was simple but had real cash-flow consequences. On an ordinary sale of business assets, HST is charged on the purchase price the same way it would be on any other sale of goods, which on $460,000 would have meant roughly $60,000 in HST added on top. Alejandro, as the buyer, would eventually be able to recover that amount as an input tax credit — a mechanism that lets a business registered for HST claim back the tax it pays on purchases used in its commercial activity — but recovering it meant filing for it after the fact, not avoiding paying it in the first place. For a deal already stretching his financing, coming up with an extra $60,000 at closing, even temporarily, was not something he had budgeted for.

The Excise Tax Act includes an election, available when a business is sold as a going concern — meaning the buyer acquires all or substantially all of what is needed to carry on the business, not just a few pieces of it — that lets the sale happen without HST being charged at all, provided both the buyer and the sellers are registered for HST and they jointly complete and file the required election. Structured properly, this removed the $60,000 cash-flow problem entirely. It did not reduce anyone's ultimate tax bill; it simply avoided the awkward step of Alejandro fronting tax he would recover later.

The second issue was harder, because it was not a form to file — it was a negotiation. Ming and Liang had claimed capital cost allowance, the tax deduction that lets a business write off the cost of equipment over time, on their shop's equipment for years. If a large share of the $460,000 was allocated to equipment in the purchase agreement, a portion of what they had already deducted would be recaptured — added back as fully taxable income in the year of sale, at their full tax rate. Money allocated instead to goodwill, the value of the business's reputation and customer base, would generally be taxed to them as a capital gain, with only half of the amount included in income. For Ming and Liang, more of the price landing on goodwill meant a meaningfully smaller tax bill. Alejandro's interest ran the other way: equipment he could depreciate going forward reduced his future taxable income, while goodwill did so more slowly. Neither side had done anything wrong. They had simply agreed on a total price without realizing the number needed a second negotiation underneath it.

What we did

1. Confirmed both sides qualified for the going concern election before relying on it. We verified that Alejandro's business was already registered for HST, that Ming and Liang's corporation was registered as well, and that the sale covered enough of the shop's assets — equipment, leasehold improvements, inventory, and goodwill together — to qualify as a sale of a business as a going concern rather than a sale of isolated pieces of equipment.
2. Built the joint election into the closing documents from the start. Rather than treating it as paperwork to be handled after signing, we drafted the purchase agreement to require both parties to complete and file the election at closing, and confirmed with each side's accountant that the sellers would not be charging HST on the invoice for the sale, so there was no confusion at the closing table about whether tax was owed.
3. Asked each side's accountant for a proposed allocation before drafting the schedule. Instead of letting the allocation become an argument inside the purchase agreement itself, we asked Alejandro's accountant and Ming and Liang's accountant to each produce a proposed breakdown of the $460,000 across equipment, leasehold improvements, inventory, and goodwill, based on a fair estimate of what each category was actually worth — not simply what result each side's tax preference favoured.
4. Negotiated the gap between the two proposals line by line. The two proposals were not close. Ming and Liang's accountant had proposed roughly $340,000 to goodwill and $80,000 to equipment; Alejandro's had proposed closer to $280,000 to equipment and $180,000 to goodwill. We worked through each asset category with both accountants — walking through the age and condition of the diagnostic and repair equipment, the value of the leasehold improvements to a unit Alejandro was taking over on an assignment of the existing lease, and a defensible range for goodwill given the shop's customer volume — until both sides had a number they could support to the Canada Revenue Agency if it were ever questioned, not just a number that suited their tax return.
5. Wrote the final allocation into a signed schedule attached to the purchase agreement. Once the numbers were agreed, we set them out as a binding schedule — equipment at $140,000, leasehold improvements at $60,000, inventory at $40,000, and goodwill at $220,000 — so both sides were legally bound to report the sale consistently on their tax filings, removing any risk of one side later reporting a different split than the other.

The outcome

The deal closed with no HST charged on the $460,000 purchase price, using the going concern election, which meant Alejandro did not need to arrange financing for a tax amount he would only recover later. That part of the negotiation worked cleanly in his favour.

The allocation was a genuine compromise, and it is worth being honest about what each side gave up. Ming and Liang ended up with less allocated to goodwill than their accountant had first proposed, which meant a somewhat larger recapture of prior depreciation than they had hoped for, taxed as income in the year of sale. Alejandro ended up with less allocated to equipment than he had wanted, which meant smaller depreciation deductions for his business in the years ahead than the more aggressive allocation would have given him. Neither side got the number their own accountant had opened with. What they got was a split that both accountants were willing to defend on paper, reached through an actual review of what the assets were worth rather than a guess in either direction, and a deal that closed on schedule instead of stalling over a disagreement that could easily have dragged on for weeks.

Alejandro took over the second location about six weeks after the agreement was signed, once the lease assignment with the landlord and the transfer of the business's supplier accounts were complete. Ming and Liang's tax bill for the sale came in higher than the number their first proposal would have produced, but within a range their accountant had told them to expect once the negotiation settled — and considerably less than it would have been if the allocation had defaulted, without negotiation, to whatever figures happened to appear on the shop's existing equipment records.

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