Purchase price allocation is the negotiated split of an asset deal's total consideration across the individual asset classes being sold — land, building, equipment, inventory and goodwill — so each side can apply the tax and sales-tax treatment that attaches to that specific asset rather than to the deal as a whole.
The allocation is negotiated because the two sides want opposite things. Treadstone Law's explanation of the mechanics puts it plainly: “land generally isn't depreciable, while a building is, so how much of the price is allocated to the building affects the buyer's ability to claim depreciation, or capital cost allowance, going forward” — and “a seller may prefer more of the price allocated to goodwill or land depending on their own tax position, while a buyer often wants more allocated to depreciable building value; this allocation is genuinely negotiated as part of the deal.”
Whatever the contract says is not the last word. ITA s. 68 lets the CRA look past the parties' own allocation: where an amount can reasonably be regarded as consideration for more than one property, the reasonable part attributable to each “shall be deemed to be proceeds of disposition” for that property “irrespective of the form or legal effect of the contract or agreement.” An allocation has to be defensible on its own facts, not just agreed on paper.
Sales tax rides on the same number. Under ETA s. 167.1, the portion of the price “reasonably attributed to goodwill” of a business sold as a going concern is excluded from GST/HST entirely — which is exactly why British Columbia's PST guidance carries an explicit warning that the buyer and seller “cannot agree to increase the price of goodwill and reduce the price of the taxable assets below the fair market value to avoid paying PST,” and that the province “may ask for information that supports the value of the taxable assets.” Saskatchewan's own bulletin takes the same reasonableness approach in reverse: where categories aren't itemised, the parties “may determine an allocation of the amounts, provided they are reasonable and consistent with the amounts reported in your accounting and income tax records.”
A fund buys a manufacturer's assets for $8,000,000 total. The parties allocate $1.2M to land, $2.3M to the building, $1.5M to equipment, $0.8M to inventory and $2.2M to goodwill. The buyer pushed for more on the building because it can claim capital cost allowance on that portion going forward; the seller, who has already claimed most of the available CCA on the same building, preferred more allocated to goodwill, which is taxed as a capital gain rather than recaptured. The final split has to hold up as reasonable on both sides — not just be the number that made the negotiation easiest.
See also: Share purchase agreement · Maintenance capital expenditure · Section 85 rollover.
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