Encyclopedia
Purchase price allocation
How a business or property price is split among land, building, equipment and goodwill.
For example: Hypothetical: a buyer and seller agree an allocation and their accountants review the tax effect. (Illustration only, not a real deal.)
The Canada Revenue Agency (CRA) handles federal tax. Official source: CRA: claiming capital cost allowance
Example only, not a real client. Say you buy a building and agree with the seller how the price is split between land and building. A larger share for the building can mean more capital cost allowance for you, but the seller may prefer a different split. Agreeing it in the contract avoids disputes later.
What I’d tell a friend
Agree the allocation in the contract, with advice from your accountant. It affects tax for both sides.
Why it matters to you
Money allocated to land, building, equipment and goodwill is taxed differently for buyer and seller. If you don't agree on it in the contract, each side may file differently and both can end up with problems.
How to use it in your deal
Buyers usually want more allocated to depreciable buildings and equipment, so you can claim capital cost allowance; sellers often prefer more to land and goodwill to limit recapture. Agree the allocation in the contract, so both sides file consistently, and keep it reasonable and supported, since CRA can challenge allocations that don't reflect value. An appraisal helps.
Property transfer tax is based on the fair market value of the land and improvements, so the allocation can also affect PTT. Goods and Services Tax (GST) may apply differently to different assets. Get tax advice before signing, not after. Lenders may care too, since they lend against real property, not goodwill. Agree on the allocation in the contract so both sides report the same numbers.
Mistakes I see
Leaving allocation out of the contract. Choosing numbers with no support. Ignoring PTT and GST effects. Each side filing different figures.
In BC and Vancouver
The Income Tax Act sets rules for capital cost allowance and recapture, and CRA can reallocate unreasonable amounts. PTT follows the Property Transfer Tax Act.
Official sources: Income Tax Act (Justice Laws) · CRA: claiming capital cost allowance · Property transfer tax (Government of BC)
What it is
Purchase price allocation is how the total price is divided among land, building, equipment and other items.
It affects tax deductions, recapture and sometimes transfer taxes.
What to know
Buyer and seller often have different interests in the split, so it can be part of negotiations.
The split should be reasonable and supported, such as by an appraisal or the assessment ratio. Ask your accountant and a BC lawyer before you sign.
Questions to ask before you sign
- How should the price be split?
- Is there an appraisal to support it?
- What are my tax effects?
- How does it affect PTT and GST?
- Does the contract fix it?
Keep reading
Related terms: Asset sale, Goodwill, Recapture (CCA), Capital cost allowance (CCA)
- Is there a 1031 exchange in Canada? What BC owners can look at instead
- Selling a business that owns or leases its real estate in BC
Working through this right now? Questions are free. Book a 15-minute call or call or text 604 256 2002, and I’ll give you a straight answer.
Back to the A–Z index · common questions · tactics to watch for · the shorter glossary
General information for British Columbia only. It isn’t legal, tax, accounting or financial advice, laws and rates change, and reading it doesn’t make you my client. Any numbers or scenarios are hypothetical. Check the linked official source and talk to a lawyer, accountant or other qualified professional before you act or sign anything. See the terms and disclaimer.