Goodwill is the value of a business above its identifiable assets, reflecting customer relationships, reputation, brand, and earning power that cannot be attributed to specific balance sheet items.
In an asset sale, goodwill is typically the largest and most negotiated component of the purchase price. The buyer is paying for something intangible: the assembled business, its reputation, its customer base, its workforce, and its ability to continue generating earnings. The CRA taxes goodwill proceeds as a capital gain, meaning only half is included in taxable income, which makes purchase price allocation between goodwill and other assets a significant planning consideration.
For the seller, maximizing the goodwill component of the sale price is tax-efficient. For the buyer, goodwill is not immediately deductible. It is a Class 14.1 depreciable asset written off at 5 percent per year on a declining balance, creating a long recovery period on a potentially large expenditure.
See also: Asset Sale vs Share Sale · Purchase Price Allocation · Business ValuationHow goodwill is treated in a transaction affects both parties’ tax positions. See how Wefinx approaches exit planning.