How is a business purchase price split when the sale includes real estate?

When a business sale includes land and a building, the real property needs its own share of the price, and that share is then divided between the land and the building. Section 68 of the Income Tax Act says that where an amount can reasonably be regarded as being in part the consideration for the disposition of a particular property, that part is deemed to be proceeds of disposition of the property, irrespective of the form or legal effect of the contract or agreement. The buyer is deemed to have acquired the property for an amount equal to that part. The split written into the agreement should therefore be one you can support. For the general method across all assets, see what purchase price allocation is.

Why land and building are separated

The Canada Revenue Agency states that land is not depreciable property, so when you acquire property, only the cost related to the building is included in the capital cost allowance areas of the form. It adds that a building may belong to Class 1, 3 or 6, depending on what it is made of and the date it was acquired, and that buildings used to store fresh fruit or vegetables at a controlled temperature, by or for the persons who grew them, and buildings used to store silage go in Class 8 instead. A dollar assigned to the building can therefore go into a class, while a dollar assigned to the land cannot. That is why the agreement should state the land and the building separately.

When the building sells below its cost

Section 13(21.1) of the Income Tax Act can deem different proceeds for a building, for the purposes it names: the undepreciated capital cost calculation and Subdivision C (taxable capital gains). It applies where a taxpayer disposes of a building of a prescribed class and the proceeds are less than the lesser of its cost amount and its capital cost immediately before the disposition. Paragraph (a) covers the case where, in the year, the taxpayer or a person they do not deal with at arm’s length disposes of land under the building, or immediately contiguous to and necessary for its use; paragraph (b) applies otherwise where either of them owned that land at any time before the disposition. Each paragraph sets its own formula, so read the subsection with your accountant before the split is fixed. Section 13(1), whose marginal note is “Recaptured depreciation”, includes in income for the year the amount by which, at the end of a taxation year, the total for E to K in the definition of undepreciated capital cost in s.13(21) for a prescribed class exceeds the total for A to D.1.

How GST/HST treats the real property

Under section 167(1) of the Excise Tax Act, where a supplier supplies a business or part of one that it established or carried on, or that another person established or carried on and the supplier acquired, and under the agreement the recipient acquires ownership, possession or use of all or substantially all of the property that can reasonably be regarded as necessary to carry it on as a business, the supplier is deemed to make a separate supply of each property and service, for the part of the consideration that can reasonably be attributed to it. Real property therefore carries its own attributed amount. A joint election under section 167(1) is not available where the supplier is a registrant and the recipient is not. Even where an election takes effect under section 167(1.1), which requires a registrant recipient to file it by the deadline that subsection sets, it does not relieve tax on a taxable supply by way of sale of real property where the recipient is not a registrant.

Land transfer tax and registration fees on the real property are not covered here; check them for the province where the property is. For the wider picture, see whether there is a business transfer tax in Canada.