Anonymised, illustrative composite. A machine-shop asset sale closed at one purchase price, but the buyer and vendor spent three weeks negotiating how that price split across equipment, real property and goodwill before either side would sign.
At a glance
An Ontario precision machine shop sold its business by way of an asset purchase agreement for a fixed total price of $3,000,000. The corporate vendor retained its shell after closing; the buyer, a strategic acquirer building a small platform of shop-floor suppliers, structured the purchase as an acquisition of the target's equipment, its owned land and building, and its goodwill — three separate categories of property under one asset purchase agreement, each taxed on a completely different basis. See the purchase price allocation glossary entry for the mechanics that made this negotiable at all.
The price was agreed before either side had settled where it landed on the schedule, and the two sides wanted opposite things from the same number. The buyer's advisors proposed allocating $1,100,000 to equipment — above the equipment's $900,000 original capital cost and well above its $380,000 undeprecated capital cost — because every dollar allocated to depreciable property becomes new capital cost allowance the buyer can claim going forward.
The vendor's accountant rejected it outright. Proceeds on depreciable property above the class's undepreciated capital cost are recaptured under the Income Tax Act: subsection 13(1) requires the excess to be “included in computing the taxpayer's income of the year” — in full, as ordinary income, not as a capital gain. Goodwill sits differently, though not for the reason most schedules assume. Since 1 January 2017 goodwill has itself been depreciable property: subsection 13(34) deems “a single goodwill property” for each business and Class 14.1 holds it, so proceeds attributed to goodwill can produce recapture too wherever that goodwill was bought and carries a cost. This vendor's goodwill was internally generated and carried a nil cost, so nothing came back as recapture on it and the whole allocation fell out as a capital gain, half-included under section 38(a)'s rule that a taxable capital gain is one-half of the capital gain. See the recapture of capital cost allowance glossary entry. The buyer's schedule was, in effect, asking the vendor to convert part of its sale proceeds from a half-taxed capital gain into fully-taxed ordinary income.
Under the buyer's original schedule — equipment $1,100,000, land and building $700,000 (against a $600,000 cost base), goodwill $1,200,000 — the recapture alone came to $520,000 (equipment proceeds capped at the $900,000 original cost, less the $380,000 undepreciated capital cost). Add the taxable half of the remaining capital gains on equipment, land and goodwill and the combined taxable amount reached $1,270,000.
Under the schedule the vendor countered with — equipment $650,000, land and building $600,000 (at cost, no gain), goodwill $1,750,000, still totalling $3,000,000 — recapture fell to $270,000 because proceeds stayed below the equipment's original cost, and the taxable capital gains total rose to $875,000 because more of the price sat in goodwill. Combined taxable amount: $1,145,000 — $125,000 lower than the buyer's schedule, on the identical $3,000,000 sale price, purely because of where the same dollars landed.
The allocation could not simply be whatever minimised the vendor's tax bill. Two separate things happen under section 167(1) of the Excise Tax Act, and it is worth keeping them apart. Paragraph (1)(a) operates automatically wherever the recipient acquires “all or substantially all of the property that can reasonably be regarded as being necessary” to carry on the business, as this buyer did: the supplier “shall be deemed to have made a separate supply of each property and service that is supplied under the agreement for consideration equal to that part of the consideration…that can reasonably be attributed to that property or service.” Paragraph (1)(b) is the joint election the parties may then make, and it is subsection 167(1.1) — not the deeming rule — that stops tax being payable on the elected supplies. Reasonably attributed, not most favourably attributed. Even with no GST/HST actually changing hands on the elected supplies, an allocation the CRA regards as unreasonable on income-tax grounds can still be reassessed independently of the election.
Goodwill carries its own exclusion from the GST/HST base, on a rule that stands whether or not the election is signed: section 167.1 provides that where the same “all or substantially all” condition is met, the part of the consideration that can reasonably be attributed to goodwill “shall not be included in calculating the tax payable in respect of the supply” — which meant the GST/HST question turned on the identical reasonableness standard as the income-tax question, and neither side could point to a number the other could not defend with a supporting valuation.
The parties commissioned a short equipment appraisal to support the $650,000 figure and settled on the vendor's counter-schedule almost unchanged. The buyer gave up $450,000 of prospective capital cost allowance base on equipment; in exchange it kept the total price fixed and avoided a schedule its own advisors could not defend as “reasonably attributed” if CRA ever asked. For a related dispute over how much of a deal survives when a buyer's own management representations come under scrutiny, see two valuations four hundred thousand apart, and for the boundary between the deduction goodwill can carry and the assets it cannot, the lifetime capital gains exemption glossary entry.
Had the buyer's original schedule stood, the vendor's corporation would have carried $520,000 of fully taxable recapture income with no preferential rate available on any of it, on top of a smaller half-taxed capital gain pool to work with when it later distributed proceeds to its shareholders. Renegotiating the schedule after signing — rather than before — would also have meant amending a filed GST/HST election and reopening a purchase agreement both sides had already executed. Settling the allocation before signature, against a documented equipment appraisal, cost three weeks of negotiation and one valuation engagement; unwinding a signed, unreasonable allocation after a CRA reassessment would have cost a great deal more, in both dollars and management time neither side could get back.
The tell was that the buyer's schedule solved only the buyer's problem. A purchase price allocation that improves one party's tax position without any documented valuation support — no appraisal on the equipment, no basis for the land and building split — and that the other party would never propose on its own is not a negotiated allocation; it is a one-sided ask wearing the shape of a schedule. Anyone reviewing a draft schedule before signing should ask the same question the vendor's accountant asked here: can each number be defended on its own, independent of who benefits from it?
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