Purchase price allocation is the process of assigning the total transaction price across the specific assets and liabilities acquired, a requirement in asset sales that determines the tax treatment of proceeds for both buyer and seller.
In an asset sale, the total purchase price must be allocated across the acquired assets: inventory, equipment, customer lists, non-compete agreements, and goodwill. The allocation matters because different assets are taxed differently. For the seller, proceeds allocated to goodwill are taxed as a capital gain. Proceeds allocated to depreciable assets may trigger recapture taxed as income. For the buyer, the allocation determines the cost base and depreciable amount of each asset, which affects future CCA deductions and therefore the long-term tax cost of the acquisition.
Buyer and seller have opposing incentives: the seller wants maximum allocation to capital gain assets; the buyer wants maximum allocation to assets with the fastest deductibility. The allocation must be agreed between the parties and reported consistently to the CRA by both sides. An allocation that favors one party without the other’s agreement creates a filing inconsistency that the CRA will investigate.
See also: Asset Sale vs Share Sale · Goodwill · Adjusted Cost Base (ACB)Purchase price allocation has tax consequences for both sides that need to be modelled before the deal is agreed. See how Wefinx approaches exit planning.