10 February 1993 Income Tax Severed Letter 9301337 - Sale of Goodwill—Reserves

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.

February 10, 1993

Toronto District Office HEAD OFFICE
Business Enquiries Rulings Directorate
J.D. Brooks
Attention: L. Wills 957-2103
Audit Review Section

930133

Sale of Goodwill

We are writing in reply to your memorandum of January 11, 1993 to
which you attached an enquiry from XXXXXXXXXX
queried whether a taxpayer would be able to claim a reserve in
respect of a sale of goodwill which would arise on the
disposition of the taxpayer's business.

Our Comments

The situation described by XXXXXXXXXX involves specific taxpayers and specific contemplated transactions and he has requested the Department's confirmation of the tax consequences. As you are aware, the Rulings Directorate provides advance income tax rulings but only to identified taxpayers on a fee for service basis. However, we do offer the following general comments which, as explained in Information Circular 70-6R2 dated September 28, 1990, paragraph 21, are not binding on the Department.

IT-123 is the bulletin which deals specifically with dispositions of eligible capital property. In the R4 version, it was stated in paragraph 4 that "payable" meant "due and payable". On this basis, a taxpayer would not have to report instalment amounts until the year in which they became due (unless they were received earlier). Paragraph 5 indicated that a taxpayer could alternatively choose to treat the entire proceeds of disposition as being payable. However, if he so chose, it was stated clearly in paragraph 21 that a reserve under paragraph 20(1)(n) of the Income Tax Act would not be permitted since the sale of an eligible capital property was not viewed by the Department as a sale of property "in the course of the business".

The definition of cumulative eligible capital in paragraph 14(5)(a) of the Income Tax Act was revised in 1988 and the R5 version of IT-123 reflects that change. Clause (iv)(A) of the definition now refers to an amount which the taxpayer "has or may become entitled to receive". Thus, in calculating proceeds of disposition of eligible capital property, there is no longer an option available to the vendor to exclude amounts which are not yet due. Paragraph 32 of IT-123R5 maintains the position stated in paragraph 21 of IT-123R4 that a reserve is not permitted since the sale of an eligible capital property is not viewed as a sale of property "in the course of the business".

The comments in IT-436R, which discusses reserves under paragraph 20(1)(n) more generally, are not relevant to the representative's enquiry. Paragraph 6 of IT-436R comments that a reserve may be claimed "under the appropriate provision of the Act." However, as noted above, the only relevant provision of the Act, paragraph 20(1)(n), is not available with respect to the sale of eligible capital.

We trust that our comments are of assistance. E. Wheeler for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch