What does it cost to carve out the building before a business sale closes?

A carve-out moves the building out of the company being sold, to the seller personally or to another company, so the buyer takes the operating business and rents or buys the property separately. The move is a transfer of property in its own right. This page lists the cost headings it can trigger, without prices, because each depends on the province, the building’s tax history and the structure.

Land transfer tax on the move

Land transfer tax can apply even when no outside buyer is involved. Ontario’s Ministry of Finance says the tax is payable when the transfer is registered, and that if the transfer is not registered within 30 days of closing, a return and the tax are due within 30 days after closing. It is normally based on the amount paid plus any mortgage or debt assumed, but in some cases on fair market value, including when land passes from a corporation to a shareholder or to a corporation that issues shares for it. A deferral may be available between affiliated corporations if notice is not registered on title. In Québec the municipality collects a duty from the new owner, subject to some exemptions.

Income tax on the transfer

The CRA says that, depending on your situation, selling business assets may produce a recapture or a terminal loss of capital cost allowance, the yearly deduction for depreciable property such as a building. Its allowance pages point to special rules for non-arm’s-length transactions and for disposing of a building in the year. The CRA also publishes form T2057, which a taxpayer and a taxable Canadian corporation use to jointly elect under subsection 85(1). Whether that election fits a carve-out is a question for your accountant.

GST/HST on the sale that follows

The carve-out can affect the election that lets a buyer and seller of a business agree that no GST/HST is payable on the sale. The CRA sets a threshold, expressed as a share of the property reasonably necessary to carry on the business, for what the purchaser must acquire under the agreement. Property that is needed but bought elsewhere, with land and a building as its example, must fit inside the small remainder. The CRA adds that taxable sales of real property to a purchaser who is not a registrant are still charged GST/HST even when the election is made.

Get each item priced before you agree

Ask your lawyer and accountant to price each heading in writing and to say who bears it. What happens if a carve-out leaves the seller’s company unable to pay its debts covers a separate risk, and how a sale works when the owner holds the building personally covers the structure.