The number one consideration for anyone buying or selling a business is price. But getting the best price is not just about the total cash value. How the purchase price is allocated across the various assets included in the deal has significant implications for the future tax liabilities of both purchasers and sellers. This article discusses some of the major considerations for purchasers and sellers in deciding how to allocate the purchase price in asset purchase agreements, and recent proposed changes to the tax treatment of goodwill which may alter the current allocation preferences of the purchaser and seller.


A purchaser will generally prefer to allocate as much of the purchase price as possible to inventory. Amounts allocated to inventory are treated as the purchaser’s cost of inventory and is deducted from the revenue received when the inventory is sold.

A seller’s ideal allocation will have a minimal amount of the purchase price allocated to inventory. An amount allocated towards the seller’s inventory will be fully included in the seller’s income as a sale of inventory.

Depreciable capital property

Under the Income Tax Act (Canada) (the ITA), the holder of depreciable capital property is entitled to deduct a portion of the total cost of each class of depreciable property held from its income each year, generally on a declining-balance basis. The rate of such deduction varies depending on the class of property.

Purchasers generally want to allocate as much of the price as possible to depreciable capital property. Purchasers will particularly want to shift the allocation towards the classes with the highest depreciation rates to maximize their ability to take advantage of that deduction.

Sellers will prefer a smaller allocation towards depreciable capital property, as amounts allocated to depreciable capital assets could result in a “recapture” under the Income Tax Act (Canada) (the ITA) if the amount allocated to the depreciable capital assets exceeds the assets’ undepreciated capital cost (UCC). Where this is the case, the recapture will be fully included in the seller’s income. Conversely, where the amount allocated towards the depreciable capital assets is less than the UCC, the seller will be able to deduct this “terminal loss” from their income for the year.

Eligible capital property, including goodwill

Historically, 75% of the amount paid for “eligible capital property”, such as goodwill, was deductible on a declining balance basis at a rate of 7%. However, amendments to the ITA proposed in the 2016 federal budget (Budget 2016) will, effective January 1, 2017, eliminate the old eligible capital property regime and include eligible capital property in a new class of depreciable capital property. The new class will have a depreciation rate of 5%.

Under the new rules, purchasers will likely prefer to allocate amounts to this new class of depreciable capital property to the extent that it has a higher depreciation rate than other classes of depreciable capital property.

Prior to the new rules, sale of goodwill generally results in an income inclusion equal to 50% of the amount by which the proceeds allocated to goodwill exceeds the seller’s cumulative eligible capital account. In certain cases, an election can be made to treat the income inclusion as a capital gain. With proposed changes in Budget 2016, goodwill and other eligible capital property will be treated as depreciable capital property; there is less benefit for a seller to allocate purchase price to goodwill as opposed to other depreciable capital property.

Non-depreciable capital property

Purchasers generally prefer to minimize allocations towards non-depreciable capital property such as land or partnership interests. While amounts allocated towards non-depreciable capital property do increase the purchaser’s tax cost in the asset, there are no ongoing deductions available to reduce the income of the purchaser. Moreover, the transfer of some non-depreciable capital property, such as land, are subject to additional taxes (i.e., the land transfer tax).

Sellers will generally prefer to allocate the purchase price to non-depreciable capital property as only 50% of the realized gain is included in income. This is in contrast to inventory and depreciable capital property (including, under the new rules, goodwill) where any gains (or, in the case of depreciable capital property, proceeds in excess of UCC) will be fully included in income.

Deemed allocation

While purchasers and sellers have their own preferences as to how purchase price is to be allocated, both parties must ensure that any allocation is reasonable and based on the actual value of the assets included in the deal. Section 68 of the ITA gives the Canada Revenue Agency (the CRA) the authority to impose its own allocation of the purchase price (with any resulting tax consequences) such that the consideration paid for each asset is “reasonable”. Generally, though, where there is genuine bargaining regarding purchase price allocation between the seller and the purchaser the CRA will accept the parties’ allocation. Accordingly, purchasers and sellers must keep in mind when negotiating the purchase price allocation that any allocation must be a reasonable reflection of the actual value of the asset in order to ensure the desired tax treatment.

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