Are the costs of buying a business tax deductible in Canada?

A buyer may hope to deduct the price of a business, plus the legal and advisory fees around it, in the first year. The Income Tax Act and the Canada Revenue Agency (CRA) point the other way for most acquisition costs. What you paid generally becomes the cost of what you bought, and any recovery happens later: through capital cost allowance for depreciable property, or as cost subtracted when you sell. This page sets out the general rules so you can ask your accountant what applies to your deal.

Acquisition costs add to cost

The CRA’s capital gains guide describes the adjusted cost base as usually the cost of a property plus any expenses to acquire it, such as commissions and legal fees. So a legal fee paid to buy a capital property is added to what you paid rather than claimed as a current expense. The cost matters later, because it is what you subtract when you eventually sell.

The Act’s limits on deductions

In computing income from a business or property, the Income Tax Act does not allow an outlay or expense except to the extent it was made or incurred for the purpose of gaining or producing income from the business or property. It also does not allow an outlay or replacement of capital, or a payment on account of capital, except as expressly permitted by that Part. Ask your accountant whether a given purchase cost is a capital outlay or an expense of earning income.

Depreciable property and goodwill

The CRA says you cannot deduct the full cost of depreciable property when you calculate your net business income for the year you acquired it. The cost is recovered through capital cost allowance. Starting January 1, 2017, the CRA includes goodwill in Class 14.1, so purchased goodwill sits in that class too. Ask how the price is split between equipment, goodwill and other assets, since each is treated differently.

Questions for your accountant

• Which of my purchase costs are added to the cost of the assets or shares?
• Are any costs an expense of earning income rather than a capital outlay?
• How should the price be split among the assets I am buying?
• Do fees paid before closing, such as for due diligence, follow the same treatment?

For other taxes a buyer may face, see What taxes does a buyer pay when buying a business?.