Buying an existing business

When you are considering becoming a business owner, you have the option of buying an existing business or starting a new one. The option you choose will affect how you will account for the purchase of the business assets for income tax purposes.

When you buy a business, you generally pay a set amount for the entire business. In some cases, the sale agreement sets out a price for each asset, a value for the inventory of the business and, if applicable, an amount that can reasonably be attributed to goodwill.

If the individual asset prices are set out in the sale agreement, and the prices are reasonable, then you could use these prices to calculate your claim for capital cost allowance (CCA).

If the individual asset prices are not set out in the contract, you have to decide how much of the purchase price you should reasonably attribute to each asset, how much to inventory, and how much, if any, to goodwill. These amounts should coincide with the amounts the vendor determined when reporting the sale.

The amount you attribute to each asset should be its FMV. You should attribute to goodwill the balance of the purchase price that remains after you attribute the FMV to each asset and to inventory.

Example

You buy a business for $480,000. The FMV of the net identifiable assets of the business is as follows:

Accounts receivable

$80,000

Inventory

$40,000

Land

$120,000

Building

$200,000

Total net identifiable assets

$440,000

You can determine the value of the goodwill by subtracting the total value of the net identifiable assets from the purchase price:

Purchase price

$480,000

Minus
Net identifiable assets


$440,000

Amount assigned to goodwill

$40,000

Once you have determined the values for the assets and the goodwill, sort the assets into the appropriate classes for the purpose of claiming the capital cost allowance (CCA). On January 1, 2017, the eligible capital property system was replaced with new capital cost allowance (CCA) class 14.1 with transitional rules.

Goodwill and certain other intangible properties are no longer considered to be eligible capital expenditures. Instead, these properties are now treated as depreciable property in new Class 14.1. For more information see Chapter 5 "Eligible capital expenditures" in guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.

Treat the value of the inventory as a purchase of goods for resale, and include it in the calculation of cost of goods sold in your income statement at the end of the year.

For GST/HST purposes, if you buy a business or part of a business and acquire all or substantially all (at least 90%) of the property that can reasonably be regarded as necessary to carry on the business, you and the vendor may be able to jointly elect to have no GST/HST payable on the sale by completing form GST44, Election Concerning the Acquisition of a Business or Part of a Business. You cannot use this election if the seller is a registrant and you are not a registrant. In addition, you must buy all or substantially all of the property, not only individual assets.

For the election to apply to the sale, you have to be able to continue to operate the business with the property acquired under the sale agreement. You have to file Form GST44 on or before the day you have to file the GST/HST return for the first reporting period in which you would have otherwise had to pay GST/HST on the purchase.

Even when you use the election, GST/HST will still apply to a taxable supply of a service made by the seller; a taxable supply of property made by way of lease, licence, or similar arrangement; and, if the buyer is not a GST/HST registrant, a taxable sale of real property.

Another way of acquiring an existing business is to buy the shares of a corporation. This does not affect the cost base of the assets of the business. A corporation is a separate legal entity and can own property in its own name. A change in the ownership of the shares will not affect the tax values of the assets the corporation owns. Generally, the purchase of shares of a corporation is not subject to GST/HST.

For more information on changes to your business, go to Changes to your business and CRA program accounts.

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