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 a gain from the sale by a foreign affiliate resident in a designated treaty country of goodwill used in an active business carried on in a designated treaty country is included in exempt earnings.
Position: Yes
Reasons: Goodwill is not capital property of the foreign affiliate. Also the rules in section 14 which would provide for the inclusion of only 50% of the gain in income do not have any bearing on the computation of the earnings from an active business carried on by a foreign affiliate.
2000 Tax Executives Institute Conference
Foreign Affiliates - Disposition of Goodwill Used in an Active Business
Where a foreign affiliate resident and carrying on an active business in a designated treaty country disposes of all of the assets used in the business to an arm's length person, will a gain from the disposition of goodwill that is associated with the business be included in the exempt earnings of the foreign affiliate.
CCRA Position
A gain from the disposition of the goodwill associated with an active business carried on in a designated treaty country by a foreign affiliate resident in a designated treaty country would be included in the "exempt earnings" of the foreign affiliate. If the gain is included in income or profit from the active business computed in accordance with the income tax law of the designated treaty country, the gain would be included in the "earnings" amount of the foreign affiliate under subparagraph (a)(i) under the definition thereof in subsection 5907(1) of the Regulations. Alternatively, if the gain is not included in the income or profit from the active business computed in accordance with the income tax law of the designated treaty country in the year of disposition and the gain will not otherwise be included in the "earnings" of the foreign affiliate in any future taxation year, it would be added to the earnings of the affiliate from the active business under paragraph 5907(2)(f) of the Regulations. In either case, the gain would be included in the net earnings and the exempt earnings of the affiliate as defined in subsection 5907(1) of the Regulations.
Prepared by: Olli Laurikainen
October 25, 2000
2000-005249
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