6 November 1991 Internal T.I. 912729 F - Inclusion Rate - Taxable Capital Gain on Sale of Goodwill

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.

Re:  Inclusion Rate - Taxable Capital Gain on Sale of Goodwill

This is in reply to your letter of September 20, 199l wherein you request our views regarding the inclusion rate respecting a sale of goodwill by a corporation, during a fiscal year which ended January 31, 1989.  You indicate that you have been given various rates ranging from 50% to 67% to 75%.  In our telephone conversation  19(1)  Guglich of October 28, 1991 you requested us to assume that the corporation's taxation year commenced February 1, 1988.

The provisions of subsection 14(1) and paragraph 14(5)(a) of the Income Tax Act (the "Act") determine the amount a corporation is required to include in its income in respect of a sale of goodwill. The inclusion rate you refer to is set out in subparagraph 14(5)(a)(iv) of the Act.

Subsection 14(1) and paragraph 14(5)(a) of the Act were amended by 1988, c. 55 and 1977-78, c. 1.

For taxation years commencing before July 1, 1988 subsection 14(1) of the Act read as follows:

    "14.(1) Amount to be included in computing income from a business.- Where, at the end of a taxation year, the aggregate of all amounts each of which is an amount determined under subparagraph (5)(a)iii) in respect of a business or an amount determined under subparagraph 5(a)(iv) in respect of the business (the latter amount hereinafter referred to as an "eligible capital amount") exceeds the aggregate of all amounts determined under subparagraphs 5(a)(i) and (ii) in respect of the business of the taxpayer, the excess shall be included in computing the taxpayer's income from that business for that taxation year."

For a taxation year commencing before July 1, 1988 paragraph 14(5)(a)of the Act read as follows:

    "(a) cumulative eligible capital. - `cumulative eligible capital' of a taxpayer at any time in respect of a business means the amount by which the aggregate of

    (i)  1/2 of the aggregate of the eligible capital expenditures in respect of the business made or incurred by the taxpayer before that time, and

    (ii) all amounts included by virtue of subsection (1) in computing the taxpayer's income from the business for a taxation year ending prior to that time,

     exceeds the aggregate of

    (iii)all amounts each of which is an amount in respect of any taxation year of the taxpayer ending before that time, equal to the amount deducted under paragraph 20(1)(b) in computing the taxpayer's income for that year from the business, and

    (iv) the aggregate of all amounts each of which is 1/2 of the amount, if any, by which

    (A)  an amount that, as a result of a transaction occurring after 1971, became payable to the taxpayer before that time in respect of a business carried on or formerly carried on by him where the consideration given by the taxpayer therefor was such that, if any payment had been made by the taxpayer after 1971 for that consideration, the payment would have been an eligible capital expenditure of the taxpayer in respect of the business,

     exceeds

    (B)  any outlays and expenses to the extent that they were made or incurred by him for the purpose of giving that consideration; and"

It is therefore our view that, by virtue of subparagraph 14(5)(a)(iv) of the Act as it read at that time, the inclusion rate would be 1/2 or 50%, in respect of a sale of goodwill by a corporation, during a fiscal year which commenced February 1, 1988 and ended January 31, 1989.

We trust our comments will be of assistance to you.

Yours truly

G. Thornley for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch