As the cost of improvements to property
will normally be categorized under the
capital cost allowance provisions,
allocating the purchase price between land
and improvements is necessary. As a rule,
such allocations must be fair, reasonable,
and defensible. Expert advice is required.
Seller and buyer perspectives on how this
allocation occurs are usually different,
owing to tax implications arising from the
determination.
The allocation of purchase price between
land and building is a key negotiating point
in many commercial transactions. The buyer
seeks to maximize building allocation (plus
chattels associated with the sale), to
establish a high capital cost for future CCA
calculations—the seller wants to minimize
the allocation to avoid recapture.
Generally, a reasonable, mutually accepted
allocation, if defensible, would undoubtedly
be sufficient in the agreement/contract .
Occasionally, commercial practitioners use
municipal tax assessment ratios as a
benchmark for the allocation. Alternatively,
an appraiser may be retained to value the
property and provide a supportable
allocation between land and improvements.
If property is sold and improvements
have no economic value, the seller may be
able to allocate the full sale price to the
land. The term no economic value generally
means that the cost of demolition exceeds
the building(s) value. From a taxation
perspective, the position taken must be
defensible. As a caution, the fact that the
buyer sees no value in such buildings, owing
to a different planned use for the property,
does not in itself create no economic value.
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