2002 Ruling 2002-0126653 - GOODWILL CEASING TO BE EXEMPT

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 CCRA.

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

Principal Issues:

1) Whether goodwill is property for the purposes of 149(10)(b) even if it has not been previously recognized;

2) Whether the amount in respect of goodwill which is disposed of and reacquired by virtue of 149(10)(b) is an eligible capital expenditure within the meaning of 14(5).

Position:

1) Yes
2) Yes

Reasons:

XXXXXXXXXX 							2002-012665

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you request an advance tax ruling on behalf of the above-named taxpayer. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayer referred to above, none of the issues involved in the ruling request is:

(i) in an earlier return of the taxpayer or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(v) the subject of a ruling previously issued by the Directorate.

Unless otherwise stated, all statutory references to a statute are to the Income Tax Act, R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act"), and all terms used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, proposed transactions and their purposes is as follows.

Definitions

The following terms have the meanings specified:

(a) "disposition time" has the meaning prescribed in paragraph 149(10)(b) and more specifically, means the time that is immediately before the time that is immediately before the time that Opco ceases to be exempt from tax under Part I connection with the transactions described in paragraph 4 below;

(b) XXXXXXXXXX;

(c) XXXXXXXXXX;

(d) "Opco" means XXXXXXXXXX ;

(e) XXXXXXXXXX;

(f) XXXXXXXXXX; and

(g) "reacquisition time" means the time that Opco ceases to be exempt from tax under Part I as a consequence of the transactions described in paragraph 4 below.

Facts

1. XXXXXXXXXX.

2. Opco is a corporation with share capital incorporated under, and governed by, the provisions of the XXXXXXXXXX. Its business number is XXXXXXXXXX and Opco files its tax returns through the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre. XXXXXXXXXX Opco is XXXXXXXXXX currently exempt from taxes under Part I of the Act by virtue of paragraph 149(1) XXXXXXXXXX.

3. In carrying out the Business, you advise that Opco has developed a significant amount of goodwill in the form of business reputation, name recognition, patronage, etc. This goodwill has not been recorded on Opco's balance sheet for accounting purposes.

Proposed transactions

4. XXXXXXXXXX.

5. XXXXXXXXXX Opco will cease to be exempt from tax under Part I of the Act and be subject to subsection 149(10), resulting in a deemed disposition and acquisition of each of its properties.

6. The fair market value of Opco's goodwill at the disposition time will be determined taking into consideration relevant valuation methods and any such other considerations as may be appropriate in the circumstances.

Purpose of the proposed transactions

7. The purpose of the proposed transactions is to allow XXXXXXXXXX to divest its interest in the share equity of XXXXXXXXXX.

Rulings requested and given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our rulings are as follows:

We confirm that

A. At the disposition time, Opco will be deemed to have disposed of its goodwill, if any, for an amount equal to its fair market value at that time and to have reacquired any such goodwill at the reacquisition time at a cost equal to that fair market value (the "deemed cost") pursuant to paragraph 149(10)(b).

B. The deemed cost of the goodwill, if any, will, to the extent otherwise permitted under section 14, be an eligible capital expenditure made or incurred by Opco within the meaning of the definition in subsection 14(5) in Opco's taxation year beginning at the reacquisition time pursuant to paragraph 149(10)(a).

The rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R4 dated January 29, 2001 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
Section Manager
Financial Institutions Team
for Division Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch