CRA indicates that a s. 85 roll of purchased goodwill at an agreed amount of unamortized cost can trigger recapture

Goodwill of a business was purchased in 2016 for $100,000, resulting in a cumulative eligible capital balance on December 31, 2016 of $75,000 (i.e., 75% of $100,000) ignoring any s. 20(1)(b) amortization deductions. The business owner (Mr. X) now wants to roll the business into a Newco under s. 85(1), electing at $100,000 (which, in the posited example, equals the boot).

This elected amount would produce $25,000 in recapture of depreciation. The essential reason is that s. 13(39), which might otherwise increase the undepreciated capital cost by $25,000 on this disposition, does not apply where s. 85(1) (or any of eight other listed rollover provisions) applies to the disposition.

However, on an ultimate disposition of the goodwill by Newco, Newco could avail itself of the s. 13(39) rule. CRA did not evince conviction that the above results represent a major anomaly.

Neal Armstrong. Summary of 27 October 2017 External T.I. 2017-0688971E5 F under s. 13(38)(c).