Are you buying a business? What are the tax implications?

Business number (BN), Payroll and Goods, and Services Tax (GST)

You may need a new BN. To find out, go to Business number registration.

To find out about payroll accounts and other related topics, go to Payroll overview.

You will want to review the relevant information on GST for the type of business you are buying at Register for a GST account.

Change of ownership

When the owner of a sole proprietorship or one of the partners in a partnership or one of the members of a corporation’s board of directors changes, it is important that you contact your tax services office.

Depending on your business structure, a change of owner(s) will have a different impact on your business. Your partnership agreement and whether or not your business was registered using the legal names of each partner or the provincially registered partnership operating name could require a legal name change, or the registration of a new Business number (BN) and program accounts with the CRA. For corporations, it is important that we have the correct name and social insurance number (SIN) of each director.

Value of the inventory and other assets

When you buy a business, you generally pay a set amount for the entire business. In some cases, the sale agreement sets out a price for each asset, a value for the inventory of the business and, if applicable, an amount that you can attribute to goodwill.

If the individual asset prices are set out in the sale agreement, and the prices are reasonable, then you should use these prices for claiming capital cost allowance (CCA).

If the individual asset prices are not set out in the contract, you have to determine how much of the purchase price you should attribute to each asset, how much to inventory and how much, if any, to goodwill. These amounts should coincide with the amounts the seller determined when reporting the sale. The amount you allocate to each asset should be its fair market value (FMV). You should allocate to goodwill the balance of the purchase price that remains after you allocate the FMV to each asset and to inventory.

Once you have determined the values for the assets and the goodwill, add the fixed assets (such as buildings and equipment) into the appropriate CCA classes. The goodwill is considered to be an eligible capital expenditure and is treated like assets eligible for CCA.

Treat the value of the inventory as a purchase of goods for resale, and include it in the cost of goods sold in your income statement at the end of the year.

For GST/HST purposes, if you buy a business or part of a business and acquire at least 90% of all of the property that can reasonably be regarded as necessary to carry on the business, you and the vendor may be able to jointly elect to have no GST apply to the sale by completing form GST44, Election Concerning the Acquisition of a Business or Part of a Business. You cannot make this election if the seller is a registrant but the buyer is not a registrant. In addition, you must buy all or substantially all of the property, and not only individual assets.

For the election to apply to the sale, you have to be able to continue to operate the business with the property acquired under the sale agreement. You have to file Form GST44, on or before the day you have to file the GST return for the first reporting period in which you would have otherwise had to pay GST on the purchase.

Even if you file the election, GST will still apply to:

  • a taxable supply of a service made by the seller
  • a taxable supply of property made by way of lease, licence, or similar arrangement
  • where the buyer is not a registrant, a taxable sale of real property

Another way of buying a business is to buy the shares of an incorporated business. This does not affect the cost base of the assets of the business. Since a corporation is a separate legal entity and it can own property in its own name, a change in the ownership of the shares will not affect the tax values of the assets owned by the corporation.

Generally, the purchase of shares of a corporation is not subject to GST.

Please contact our office if you require any help with your purchase or have any questions.