11 February 2003 External T.I. 2002-0170755 - GUIDING AND OUTFITTING LICENSES

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:

Treatment of proceeds of sale / transfer of guiding and outfitting licenses.

Position:

General information provided.

Reasons:

Insufficient information.

XXXXXXXXXX 2002-017075
T. Young, CA
February 11, 2003

Dear XXXXXXXXXX:

Re: Sale of Guiding and Outfitting Licenses

This is in reply to your letter of October 22, 2002, requesting our views on the income tax treatment of the sale of guiding and outfitting licenses.

In your letter, you stated that an individual has operated a Guiding and Outfitting business for a number of years. Over that time, he has been awarded a number of licenses at no cost. He is now contemplating ceasing business and selling the licenses to another outfitter.

You have asked us how the sale should be treated for income tax purposes.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. A definitive determination would also require an examination of all the relevant facts including all documentation relating to the sale of the licenses and the respective provincial legislation governing the licenses. However, we are prepared to provide the following comments, which may be of assistance to you.

The income tax treatment of the disposal of licenses relating to a guiding and outfitting business is dependant on several factors including whether the licenses are for a limited or unlimited period of time and whether the legislation granting the licenses allows for the sale or transfer of the licenses to a third party. However, generally, the disposal of licenses would result in one of the following:

1. If the licenses were for an unlimited period of time, the disposal would likely be considered a disposition of eligible capital property.

2. If the licenses were for a limited period of time, the disposal would probably be considered a disposition of Class 14 depreciable property.

Eligible Capital Property

As discussed in paragraph 1 of IT-386R, Eligible Capital Amounts, "Eligible capital property" ("EC property") of a business may be broadly described as intangible capital property, such as goodwill and other "nothings", the cost of which neither qualifies for capital cost allowance nor is fully deductible in the year of its acquisition as a current expense. Some other examples are franchises, concessions, or licences for an unlimited period.

"Cumulative eligible capital" is basically an expenditure pool relating to eligible capital property which is increased by a portion of each "eligible capital expenditure" made to acquire eligible capital property and decreased by each "eligible capital amount" related to the proceeds from the disposition of an eligible capital property. The decrease to the pool for an eligible capital amount in a particular taxation year can cause the pool to have a negative balance at the end of that year. Where this occurs, subsection 14(1) of the Income Tax Act (the "Act") requires an amount to be included in the taxpayer's income from the business for the year and, in some cases and for certain taxpayers (primarily individuals), also provides for a deemed taxable capital gain in the year. A full discussion on these provisions is contained in IT-123R6, Transactions Involving Eligible Capital Property.

You can find additional information on eligible capital expenditures in the guide T4002, "Business and Professional Income".

Class 14 Depreciable Property

As discussed in paragraph 1 of IT-477 (Consolidated), Capital Cost Allowance - Patents, Franchises, Concessions and Licences, class 14 property is prescribed to be property that is a patent, franchise, concession or licence for a limited period in respect of property but does not include certain properties relating to natural resources, a leasehold interest, property included in Class 23, or a license to use computer software. When depreciable property is disposed of, the balance in the capital cost allowance (CCA) pool for that class is reduced by the proceeds of disposition, up to the capital cost of the asset. If the resulting balance is negative, subsection 13(1) of the Act will include the balance in the taxpayer's income. If there is a positive balance and the taxpayer has no more assets in that class, the taxpayer may be able to deduct a terminal loss pursuant to subsection 20(16) of the Act. Any excess of the proceeds of disposition over the capital cost of the asset triggers a capital gain. You can find more information on recaptured depreciation and terminal losses in interpretation bulletin IT-478R2, Capital Cost Allowance - Recapture and Terminal Loss.

The above-mentioned publications can be found on our website (www.ccra.gc.ca).

We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

- 3 -