In an asset deal the parties agree not just a price but a schedule splitting it across inventory, equipment, goodwill, real property and any restrictive covenant — and their interests there are opposed. Income Tax Act section 68 decides what happens next, and does not treat that schedule as the last word.
Key takeaways
SECTION 01 OF 10
Its marginal note is Allocation of amounts in consideration for property, services or restrictive covenants, and it opens: “If an amount received or receivable from a person can reasonably be regarded as being in part the consideration for the disposition of a particular property of a taxpayer, for the provision of particular services… or for a restrictive covenant as defined by subsection 56.4(1)”. Three deeming rules follow.
Paragraph (a) governs an asset sale: that part of the amount “shall be deemed to be proceeds of disposition of the particular property irrespective of the form or legal effect of the contract or agreement, and the person to whom the property was disposed of shall be deemed to have acquired it for an amount equal to that part”.
Read the two halves together. The section does not merely let the Canada Revenue Agency second-guess a seller: it fixes one number and gives it to both parties. Treadstone Law puts it plainly — Canadian tax law “includes provisions that allow the CRA to reallocate the purchase price if the stated allocation is not reasonable.”
SECTION 02 OF 10
The seller is choosing between two rates. Under paragraph 38(a) a taxable capital gain is “½ of the taxpayer’s capital gain”; business income is taxed in full. A dollar pushed into goodwill or land is taxed at half the rate of a dollar pushed into inventory.
Inventory has no capital character available. Subsection 23(1), marginal note Sale of inventory, deems inventory sold on or after disposing of a business “to have been sold… in the course of carrying on the business”. Treadstone Law: proceeds from inventory “are treated as ordinary business income, taxed in full, not as a capital gain.”
The buyer wants cost where it comes off income fastest. Per section 1100(1)(a) of the Income Tax Regulations: Class 1 buildings 4 per cent a year, Class 8 equipment 20, Class 10 30, Class 14.1 goodwill 5, land nothing. Inventory beats all of them. The buyer’s ranking is close to the reverse of the seller’s — the fight is arithmetic, not bad faith.
SECTION 03 OF 10
Sellers treat equipment as neutral because it goes out near book value. It is not. Where the amount allocated to a class exceeds the undepreciated capital cost of that class, subsection 13(1) — marginal note Recaptured depreciation — provides that the excess “shall be included in computing the taxpayer’s income of the year”. That is fully taxable, not a capital gain.
A business that has claimed capital cost allowance for fifteen years has almost none left, so nearly the whole equipment allocation returns as income in the year of sale — and the buyer gets what the seller pays for: a higher cost base “means larger CCA claims are available to the buyer going forward.”
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The test is objective and about the amount, not the paperwork: what part of the price can reasonably be regarded as consideration for each thing transferred. That is a valuation question answered on evidence — what the equipment was worth, what the inventory counted out at, what the business earns beyond a return on its identifiable assets.
Two things the wording does not do. It requires no election, form or joint filing — the deeming operates by itself on the facts. And it does not say “unreasonable” or “artificial”: there is no threshold of abuse to cross before section 68 engages.
SECTION 05 OF 10
The phrase is “irrespective of the form or legal effect of the contract or agreement”. A contract binds the people who signed it. It does not settle the tax consequences of what they did: the Crown is not a party to it, and section 68 expressly declines to be bound by its form.
So a schedule is evidence, not an answer. Where parties with opposed interests negotiated the split at arm’s length and a valuation supports the numbers, it is strong evidence. Where one side was indifferent and the schedule was drafted the night before closing to suit the other, it is weak.
The exposure runs both ways, rarely at once: a buyer who accepted an inflated goodwill figure to help the seller close can find its Class 14.1 balance cut long after the seller’s return is statute-barred.
SECTION 06 OF 10
The clearest proof that an agreed split is not final is a rule overriding it with nobody reassessing anything. Subsection 13(21.1), marginal note Disposition of building, applies “Notwithstanding… the definition proceeds of disposition in section 54” where a taxpayer disposes of a building of a prescribed class for proceeds “less than the lesser of the cost amount and the capital cost” of it, and also disposes of the land under or beside it. It then deems different proceeds for each.
The Canada Revenue Agency describes the effect in Guide T4037, Capital Gains: selling a building on those facts “may restrict the terminal loss on the building and reduce the capital gain on the land”. It exists because the incentive reverses on real property — a seller wanting a terminal loss on a depreciated building pushes value onto the land, where the gain is half-taxed. The guide also states the baseline duty: “determine how much of the selling price relates to the land and how much is for the building”.
SECTION 07 OF 10
Goodwill is not valued directly. As Treadstone Law puts it, goodwill “is typically valued by estimating what portion of the purchase price cannot be attributed to identifiable assets.” It is the residual, so every other line in the schedule moves it and an argument about equipment values is always also an argument about goodwill.
Since 2017 it has been depreciable property. Subsection 13(34), marginal note Goodwill, deems there to be “a single goodwill property in respect of the particular business”. It sits in Class 14.1 at 5 per cent — which softened the fight without ending it: twenty years to recover most of it, against four or five for Class 8.
SECTION 08 OF 10
Section 68 names restrictive covenants expressly: paragraph (c) deems the part reasonably regarded as consideration for one to be received “in respect of the restrictive covenant irrespective of the form or legal effect of the contract”. The definition it borrows, in subsection 56.4(1), is very wide — an agreement, undertaking or waiver “whether legally enforceable or not, that affects, or is intended to affect, in any way whatever, the acquisition or provision of property or services by the taxpayer”.
The consequences need their own treatment and have one — see our article on restrictive-covenant payments. Treadstone Law summarises the default: an amount specifically identified as consideration for a promise not to compete “is often treated as fully taxable ordinary income”. The narrower allocation point: a covenant need not be given a line in the schedule to be caught, because section 68 asks what part of the amount can reasonably be regarded as consideration for it. Silence is not the same as nothing being paid.
SECTION 09 OF 10
The Excise Tax Act uses parallel language. Paragraph 167(1)(a) deems a supplier of a going-concern business to have made a separate supply of each property and service “for consideration equal to that part of the consideration… that can reasonably be attributed to that property or service”, and the CRA confirms in GST/HST Memorandum 14-4 that this applies “regardless of whether or not… the recipient proceed to make the election”. Goodwill is carved out: section 167.1 excludes the part attributable to it from “calculating the tax payable in respect of the supply”.
Where the deal includes real property, a third taxing authority takes an interest in the same line. Ontario’s Land Transfer Tax Act charges tax on registration of a conveyance at rates rising to 2 per cent of “the value of the consideration that exceeds $400,000”. As Treadstone Law notes on the going-concern election, real property “can bring in Ontario land transfer tax considerations separate from HST”.
SECTION 10 OF 10
Build the evidence before signing: an equipment appraisal, an inventory count agreed at closing, a valuation deriving goodwill as a residual from real earnings. Treadstone Law’s note on inventory disputes shows where this fails — counts “differ from book records, or the parties disagree about how to value slow-moving or obsolete stock.”
Then file consistently. Section 68 produces one number for both parties, so a buyer claiming capital cost allowance on a figure the seller never reported as proceeds hands an auditor the discrepancy. Agreeing in the purchase agreement that both will file on the schedule, and flag any reassessment touching it, costs nothing.
And do not paper a number nobody can support. The schedule is worth what the valuation behind it is worth, and the party holding the working papers is the party who wins the argument.
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