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.
Principal Issues:
Do intangible assets consisting of distribution networks and group life and health and individual health contracts constitute "goodwill" referred to in ss2400(6)?
Position:
If the intangible assets are recognized apart from goodwill under generally accepted accounting principles, the assets do not constitute "goodwill" for purposes of ss2400(6).
Reasons:
As the term "goodwill" is not defined in the Act, its' meaning should be based on its' meaning under generally accepted accounting principles.
May 19, 2009
KITCHENER TSO HEADQUARTERS
Large File Audit Income Tax Rulings
Directorate
Attention: Brian Webb Helen Zelobowski
(519) 571-6987
2009-030791
The Application of Subsection 2400(6) of the Regulations to the Income Tax Act to Identified Intangibles
We are writing in response to your request during our telephone discussion on April 28, 2009 for our comments relating to the application of subsection 2400(6) of the Regulations to the Income Tax Act (the "Regulations") to identified intangible assets acquired in a business combination. In the business combination that you have described to us, the intangible assets acquired include both goodwill and assets that have finite useful lives consisting of distribution networks and group life and health and individual health contracts. Specifically, you have asked whether the latter may constitute "goodwill" that is referred to in subparagraph (b)(i) of this subsection.
Subsection 2400(6) of the Regulations
Subsection 2400(6) of the Regulations deems certain assets to not have been used or held in the course of carrying on an insurance business for purposes of clause (a)(ii)(B) of the definition of the "Canadian investment fund" in subsection 2400(1) of the Regulations. The assets impacted by this subsection include goodwill which arose as a result of an amalgamation, a winding-up of an affiliated financial institution, or the assumption by the insurer of any obligation of another insurer with which the insurer deals at arm's length provided that the conditions in clauses (A) and (B) of this subsection are met regarding the reserve in respect of the obligation.
The issue is whether the identified intangibles described above may constitute "goodwill" referred to in this subsection, assuming the other conditions in this subsection regarding how the asset arose are satisfied.
Meaning of "Goodwill"
As the term "goodwill" is not defined in the Act, it is our view that its' meaning should be based on its' meaning under generally accepted accounting principles ("GAAP"). Section 1581 of the CICA Handbook distinguishes between goodwill and other identifiable intangible assets. Paragraph 48 of this section recommends that an intangible asset be recognized apart from goodwill when the asset results from legal rights or when the asset is capable of being separated from the acquired enterprise and sold, transferred, licensed, rented, or exchanged. Therefore, under GAAP, intangible assets that meet the recognition criteria are not goodwill.
Conclusion
In our view, if the identified intangible assets described above meet the recognition criteria under GAAP, the assets do not constitute "goodwill" for purposes of subsection 2400(6) of the Regulations. Accordingly, such assets will not be deemed to not have been used or held in the course of carrying on an insurance business for purposes of the calculation of the "Canadian investment fund".
We trust that these comments will be of assistance.
Yours truly,
F. Lee Workman
Manager
Charitable and Financial Institution Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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