25 August 1994 Internal T.I. 9411027 - TERMINAL ALLOWANCE - ELIGIBLE CAPITAL PROPERTY

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether subsection 24(1) will apply to allow a taxpayer who has ceased to carry on business to deduct the balance of his or her cumulative EC pool where the taxpayer owns eligible capital property which is worthless.

Position TAKEN:

Subsection 24(1) will apply.

Reasons FOR POSITION TAKEN:

Subsection 24(1) applies in the first taxation year in which the taxpayer has not only ceased to carry on business, but has also disposed of all of the eligible capital property, other than property of no value, that was held by the taxpayer in respect of the ceased business.

							August 25, 1994

	North York District Office		Head Office
	Business Inquiries			Rulings Directorate
	471-6-1					C. Chouinard
	John Cunningham				957-8953
							7-941102

Terminal Allowance - Eligible Capital Property

This is in response to your memorandum of April 19, 1994 wherein you requested our opinion on the application of subsection 24(1) of the Income Tax Act (the "Act") where a taxpayer has ceased to carry on business, but still owns eligible capital property which is worthless. In the situation you describe, the taxpayer has ceased carrying on a "distributing" business upon the collapse of the underlying "franchisor" and the eligible capital property is distribution rights.

Our Comments

As you indicated in your memorandum, subsection 24(1) of the Act was amended in 1991. Subsection 24(1) of the Act, as it read prior to the amendment, allowed a taxpayer who had ceased to carry on a business to deduct the full amount of any positive balance in the cumulative eligible capital pool for the business. The effect of the amendment is to defer the application of subsection 24(1) of the Act until the taxpayer's first taxation year in which the taxpayer has not only ceased to carry on the business, but has also disposed of all of the eligible capital property, other than property of no value, that was held by the taxpayer in respect of the ceased business. Presumably, eligible capital property of no value was excluded because it is unlikely that the taxpayer could dispose of such property.

Therefore, in response to your query, if the taxpayer has ceased to carry on business and has disposed of all eligible capital property used in the business, other than eligible capital property that has no value, the taxpayer will be entitled to deduct the residual cumulative eligible capital in respect of the business.

As regards the distribution rights, it is a question of fact whether these distribution rights are of no value and whether the taxpayer has any recourse against the franchisor. Although the valuation of property is not within our area of responsibility, it seems likely that, in this situation, the rights are worthless. Should you require assistance in determining the value of the distribution rights, we suggest you contact the Valuations Division.

R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch