Purchase Price Allocation
Allocation of the total transaction price across the different asset categories (equipment, inventory, goodwill, non-compete clause, etc.) in an asset sale, each carrying a distinct tax treatment for the seller.
Definition
Purchase price allocation (PPA) is the exercise of dividing the total transaction amount across the different categories of assets transferred in a business sale structured as an asset sale.
In French-language Quebec documentation, you’ll see allocation du prix de vente used for the same concept.
Rather than selling the corporation’s shares (which is a single transaction on a single property), an asset sale involves the transfer of multiple items — equipment, inventory, accounts receivable, goodwill, intellectual property, non-compete clause — and each category receives its own portion of the total price.
This allocation isn’t just an accounting exercise. It directly determines the tax treatment of every dollar the seller receives, and it must be consistent between the seller’s and the buyer’s filings with the CRA and Revenu Québec.
Why purchase price allocation matters in a business sale
For a Quebec SME seller, the allocation of the price across asset categories can materially change the tax bill. Here’s why: goodwill is treated as a capital gain, with only a portion taxable at the marginal rate.
Inventory, by contrast, is taxed as ordinary business income — at the top rate. Equipment can trigger a CCA recapture (recovery of previously claimed capital cost allowance), also taxed as ordinary income.
Take a simplified example. On a $2,000,000 asset sale, allocating $1,200,000 to goodwill and $300,000 to inventory is much more advantageous for the seller than allocating $800,000 to goodwill and $700,000 to inventory. The difference can represent tens of thousands of dollars in tax.
The challenge: the buyer often has opposing interests. They prefer allocating more to depreciable assets (equipment, leasehold improvements) and to inventory, because they can deduct these more quickly against future income.
Allocation is therefore an integral part of the price negotiation, and an unprepared seller can leave significant money on the table.
What every seller should know
- Allocation must be negotiated before the purchase and sale agreement is signed. Once written into the contract and reported to the tax authorities, it’s very hard to change.
- The seller benefits from maximizing the portion allocated to goodwill (capital gain, favourable tax treatment) and to the non-compete clause (which, with a joint election between seller and buyer under section 56.4 of the ITA, can receive more favourable tax treatment than ordinary income).
- Allocation must be reasonable and reflect the fair market value of each asset category. The CRA can challenge it if it looks artificial or lacks economic substance.
- Your business transfer broker and tax specialist should work together on this negotiation. The tax stakes of the allocation can represent 5% to 10% of the total sale price.
This content is informational. Consult a tax specialist for your specific situation.