Can the CRA challenge a purchase price allocation years after closing?

An allocation is not final on closing day. The agreement may state a price for each asset, but that figure is not the last word. Two questions decide whether it can reopen the numbers years later: were the amounts reasonable, and has the time to reassess run out? For how the split is set in the first place, see purchase price allocation.

The reasonableness test

Section 68 of the Income Tax Act applies when an amount can reasonably be regarded as being in part the consideration for the disposition of a particular property, for particular services or for a restrictive covenant. The part that can reasonably be regarded as each of those is treated as such, irrespective of the form or legal effect of the contract. A figure the parties signed therefore does not bind the CRA if it does not reasonably match what was being paid for.

The time limit

The Act sets a normal reassessment period for each return, counted from the original notice of assessment, and its length differs by type of taxpayer. After it ends, the CRA may reassess only in listed cases. They include misrepresentation attributable to neglect, carelessness or wilful default, fraud, a waiver the taxpayer filed, and some reassessments made as a consequence of another taxpayer’s assessment.

Why each return has its own clock

The period runs separately for each year’s return. A seller reports the sale in one year. A buyer who claims capital cost allowance on the allocated amounts reports it in every later year, so the buyer’s returns open and close on different dates. The CRA’s guidance on selling a business notes that a sales agreement may set a price for each asset and that, depending on the situation, the sale can produce a recapture or terminal loss of capital cost allowance, so the seller’s figures can move too.

Keeping the numbers defensible

• Keep the appraisals, inventory counts and valuation support behind each figure.
• Check that the agreed schedule matches what each side actually filed.
• Agree in the contract how the parties will cooperate if the CRA proposes a change.