Purchase Price Allocation

In a share purchase, the buyer acquires one asset, the shares, and the corporation keeps the existing tax values of everything it owns. In an asset purchase, the buyer acquires a basket of separate assets, each with its own tax treatment, so the single price has to be divided among them. That division is the allocation, and it is normally set out in a schedule to the asset purchase agreement.

The allocation does not change the total price. It changes what that price is worth to each side after tax, sometimes by a large amount, which makes it a negotiation rather than an accounting afterthought. The CRA's guidance on buying an existing business says that where the contract does not price each asset, each should be attributed its fair market value, goodwill takes the balance of the price that remains, and the buyer's amounts should coincide with those the seller used when reporting the sale. How the asset or share structure is chosen in the first place is covered under asset purchase vs. share purchase.

Section 68 of the Income Tax Act applies when an amount is partly consideration for a taxpayer's property and partly for something else, including other property, services or a restrictive covenant. The part that can reasonably be regarded as consideration for the property is deemed to be its proceeds of disposition, irrespective of the form or legal effect of the contract, and the buyer is deemed to have acquired the property for the same amount. In practice, the CRA can replace an unreasonable split, and the replacement figure applies to both sides.

The leading case is The Queen v. Golden, [1986] 1 SCR 209. In 1973 the vendors sold an Edmonton apartment complex to an arm's-length purchaser for $5,850,000, allocating $5,100,000 to land and $750,000 to buildings, equipment and other improvements. The Minister shifted more of the price to the buildings, greatly increasing recaptured capital cost allowance, and the Crown's appraiser valued the land alone at $2,320,000. Four of the seven judges, in reasons by Estey J., held that section 68 can apply to an allocation among different types of property but that the parties' allocation was reasonable; the other three held that section 68 did not apply. The Crown's appeal was dismissed. The trial judge had referred the assessments back on the basis that the consideration for the land alone was $2,320,000, even though he found that $5,100,000 was not an unreasonable price for the purchaser to pay for the land alone. The Federal Court of Appeal reversed, giving considerable weight to an allocation agreed at arm's length.

The lessons: section 68 lets the CRA look behind a contractual allocation, an arm's-length agreement carries real weight, and an allocation backed by appraisals and opposing tax interests is far easier to defend than one that suits both parties at the treasury's expense. A separate rule, subsection 13(21.1), can reallocate proceeds between a building and its land, notably where a seller would otherwise claim a terminal loss on the building while realizing a gain on the land.

Non-compete payments need particular care. Section 68 also reaches amounts that can reasonably be regarded as paid for a restrictive covenant. Under section 56.4, such an amount is generally included in income in full. The main exceptions on a business sale cover a covenant given to an arm's-length buyer as part of a sale of the business's goodwill or of shares, and they require an election in prescribed form.

A seller with heavily depreciated equipment wants little of the price allocated to it, to limit recapture, and more to goodwill and land, where the gain is a capital gain. As of October 2026, one-half of a capital gain is included in income; the increase to two-thirds proposed in 2024 was cancelled in March 2025. If the seller is a private corporation, the untaxed half of the gain is added to its capital dividend account and can be paid to shareholders as a tax-free capital dividend.

A buyer wants the opposite: more on inventory and equipment, which it can deduct quickly, and less on land and goodwill. Because each side's gain is the other's cost, the tension itself helps keep the result close to fair market value.

Goodwill usually takes whatever part of the price is not assigned to identifiable assets, so it sits at the centre of most allocation debates. For a seller, goodwill the business built itself usually has a nil cost, so most of the amount allocated to it is a capital gain. For a buyer, goodwill is Class 14.1 property and slow to deduct. The entry on goodwill in a business sale covers the Class 14.1 rules and how buyers protect what they pay for.

That gap may widen. On September 15, 2026, the federal government proposed a permanent Productivity Mega Deduction that would allow immediate expensing of a broad range of depreciable property acquired on or after that date. The Department of Finance backgrounder excludes Class 14 and 14.1 property such as goodwill, and buildings in Classes 1 and 3. Used property qualifies only if neither the buyer nor a non-arm's-length person previously owned it and it was not acquired on a tax-deferred rollover. It was released as draft legislation and, as of October 2026, is not yet law. If enacted, it would make each dollar allocated to qualifying equipment rather than goodwill considerably more valuable to a buyer.

Ontario asset purchase agreements deal with allocation in one of three ways: a fixed schedule signed with the agreement; a schedule to be agreed before closing, with a tie-breaker such as an independent valuator; or an allocation prepared by the buyer that the seller may dispute. Whichever is used, the agreement should require both sides to file their returns consistently with it and should say how the allocation changes if the price later moves for a working capital adjustment or an indemnity payment.

Allocation matters beyond income tax. Where land and buildings are included, the amount assigned to them generally sets the consideration on which Ontario land transfer tax is calculated. HST is a separate question: when its conditions are met, the buyer and seller can jointly make a section 167 election under the Excise Tax Act so that no HST is payable on most of the assets transferred.

Our buying a business in Ontario checklist places the allocation among the other closing items, and Lamba Law's asset vs. share sale checker helps test which structure fits before the allocation debate begins.

Mei-Ling Wong's corporation sells the assets of a Brampton commercial bakery to a company owned by Yaw Obeng for $2,000,000. The premises are leased, so no real estate changes hands. The equipment originally cost $600,000 and has an undepreciated capital cost of $150,000; inventory at cost is $60,000.

Yaw's first draft allocates $800,000 to equipment. Mei-Ling's accountant points out that this exceeds the equipment's original cost, so her corporation would face $450,000 of recapture plus a $200,000 capital gain on the equipment, and the figure could not be supported as fair market value. Mei-Ling counters with $250,000.

They commission an independent appraisal, which values the equipment at $450,000, and settle on $450,000 for equipment, $60,000 for inventory and $1,490,000 for goodwill, with a statement that no separate amount is paid for Mei-Ling's non-compete. Mei-Ling's corporation reports $300,000 of recapture and a $1,490,000 capital gain on goodwill, half of it taxable and half added to its capital dividend account. Yaw's company begins claiming capital cost allowance on $450,000 of equipment and $1,490,000 of Class 14.1 goodwill. Because the parties dealt at arm's length, had opposing interests and relied on an appraisal, the allocation is well placed to withstand a section 68 review.