Should equipment be priced at original cost or current worth in a business sale?

Original cost and current worth answer different questions. Original cost records what the business paid for the item. Current worth is what it is worth today, given its age, condition and how long it can keep doing the job. A buyer gets the item’s use from here on, so current worth speaks more directly to price than cost does, and the seller’s cost figures show the history.

What original cost tells you

The CRA explains that depreciable property such as furniture and equipment may wear out or become obsolete, so its cost can be deducted over several years as capital cost allowance. It groups such property into classes, each with its own rate, and lists machinery and other business equipment among its examples. The seller’s records therefore show cost, claims made so far and a remaining balance, which the Income Tax Act calls undepreciated capital cost: a tax calculation by class, not an appraisal.

What current worth means

Current worth looks forward. It asks what the item could be sold for today, or what it would cost to replace with something comparable. Equipment obsolescence describes the signs, and equipment appraisal explains the kinds of value an independent appraiser can state.

Why the allocation matters for tax

Section 68 of the Income Tax Act says that where an amount can reasonably be regarded as partly the consideration for a particular property, that part is deemed to be the seller’s proceeds of disposition for it and the buyer is deemed to have acquired it for the same amount, irrespective of the form or legal effect of the contract. The CRA adds that a sale agreement may set a price for each asset, and that the seller may have a recapture or terminal loss of capital cost allowance. Because the test is what can reasonably be regarded as the consideration for each property, the figure assigned to an item should be one the parties can support with evidence of its value.

What to ask for

• The capital cost allowance schedule, showing cost, claims to date and the remaining balance by class.
• Age, condition and maintenance records for each major item.
• A lien search covering the major items, so you are not paying for equipment a lender holds security over; see how to check for liens on business assets.
• An independent appraisal where the amount is material.