7 February 1992 Income Tax Severed Letter 9200385 - Sale of Sports Francise — Player Contracts

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 Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Subject: SALE OF SPORTS FRANCISE-PLAYER CONTRACTS Section(s): 14(1),
54(c), 9(1), 39(1)]

XXX

920038
Glen Thornley
(613) 957-2101

XXX

February 7, 1992

Dear Sirs:

Re: Treatment of Sale Proceeds of a Sports Franchise

This is in reply to you letter of December 20, 1992 requesting we confirm your understanding that the current administrative policy of the Department is that when the assets of a Canadian professional sports franchise are sold, the vendor is entitled to treat the proceeds of disposition allocable to player contracts as a receipt on capital account; and receipts in respect of the disposition of the sports franchise as an eligible capital receipt.

The Income Tax Act does not contain any provisions respecting the apportionment of the purchase price between “Player contracts” and “Franchise”.

As a result the split is a question of fact that should be made on the basis of “Generally Accepted Valuation Principles”. The Business Equity and Valuation Section of the responsible District Office would be in the best position to advise on the apportionment of the purchase price.

Sale and Purchase of a “Franchise” and/or “player contracts”

Although such matters are generally a question of fact requiring access to the contracts and other relevant documents, the amount received by a vendor with respect to the sale of a franchise would normally constitute an “eligible capital amount” within the meaning of subsection 14(1) of the Act and the amount paid by the purchaser would constitute an “eligible capital expenditure” within the meaning of paragraph 14(5)(b) of the Act.

We also agree that on the basis of jurisprudence the vendor's proceeds of disposition respecting the “Players' Contracts”, when disposed of in the course of the disposition of the business, would normally be on account of capital. Additionally, on the basis of the August 26,1970, press release by the former Minister of National Revenue the cost of the “Players' Contracts” to the purchaser could usually be written off over the estimated useful playing life of the players. The determination of the length of the playing life of the players is a question of fact dependent on the specific details in the case. The purchase and sale of individual player contracts may, depending on all the circumstances, be on income account.

The foregoing is an opinion based on the limited information available and, as such, it does not constitute an advance income tax ruling. We caution further that the audit results of an actual situation may very well result in a different conclusion. Therefore, if you have a completed transaction you may wish to discuss the income tax ramifications of what has taken place with officials at your local district taxation office. If, on the other hand, you have a particular proposed transaction or transactions in mind your may wish to apply for an advance income tax ruling in accordance with the instructions in Information Circular 70-6R2.

We trust our comments will be of assistance to you.

Yours truly,

E. Wheeler
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch