19 March 1985 Income Tax Severed Letter 5-7454 - []

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.

XXXX P.K. Tang 995-1787

March 19, 1985

Dear Sirs:

This is in reply to your letter of February 20, 1985 wherein you request our views in respect to the taxation of goodwill proceeds on the sale of a business in light of the following questions:

1. Are proceeds from the sale of goodwill incidental to an active business eligible for the small business deduction assuming all other requirements are met?

2. Would the income also be eligible for the manufacturing and processing deduction if applicable?

3. What effect would the deferral of proceeds and therefore income to future taxation periods have on the nature of the income brought to tax and on the eligibility to claim either or both the small business and manufacturing and processing deductions?

Our views to your questions in the order as presented are as follows:

1. Proceeds from the sale of goodwill incidental to an active business would qualify as income from an active business in the year they are received. Such amounts would hence be eligible for the small business deduction pursuant to subsection 125(1) of the Income Tax Act (the "Act") if all other requirements contained therein are also met.

2. On the assumption that the proceeds were received in the year subsequent to the year in which the business was sold, such proceeds would not qualify for the manufacturing and processing profits deduction provided under section 125.1 of the Act because the amounts do not qualify as "Canadian manufacturing and processing profits" as defined in paragraph 125.1(3)(a) of the Act and Part LII of the Income Tax Regulations (the "Regulations"). Under section 5201 of the Regulations, "Canadian Manufacturing and Processing Profits" of a corporation are prescribed to be equal to its income for the year from an active business carried on in Canada when, among other things, its activities during the year were primarily manufacturing or processing in Canada of goods for sale or lease when its net income from an active business for the year did not exceed $200,000. For other situations, "Canadian Manufacturing and Processing Profits" of a corporation are prescribed, under section 5200 of the Regulations, to be that portion of its income from an active business for the year carried on in Canada calculated with reference to its cost of manufacturing and processing capital and its cost of manufacturing and processing labour for the year. However, in the situation described if the corporation's activities were not primarily manufacturing and processing in Canada of goods for sale or lease it would not have Canadian manufacturing and processing profits for the year.

3. In line with the decision of the case of The Queen vs Timagami Financial Services Ltd. 82 DTC 6268, the portion of the proceeds from the sale of the goodwill that is not due and payable in the year of sale will be included as income in the years it becomes due and payable to the vendor. If the taxpayer does not carry on any manufacturing and processing business in those years, the deferral would result in the loss of the manufacturing and processing profits deduction provided under subsection 125.1(1) of the Act in those years. However, these amounts would still be eligible for small business deduction under subsection 125(1) of the Act if other requirements contained therein are met, whether or not the taxpayer carries on any business in those years.

We hope the above will be of assistance to you.

Yours truly,

for Director Corporate Rulings Division Corporate Rulings Directorate Legislation Branch