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.
XXXXXXXXXX 5-933716
Attention: XXXXXXXXXX
June 6, 1994
Dear Sir:
Re: Technical Interpretation - Paragraph 89(1)(b)
We are writing in response to your letter of December 17, 1993 in which you requested the Department's interpretation of paragraph 89(1)(b) of the Income Tax Act where a partnership, with a corporate partner, realizes proceeds of goodwill the amount of which is deemed to be a taxable capital gain under subsection 14(1). To illustrate your point you have described the following hypothetical situation:
1.Partnership XYZ is a Canadian Partnership throughout the year. There are three partners; X is a corporation and Y and Z are individuals. All three partners are resident in Canada and share income on an equal basis.
2.Partnership XYZ sells a business in its 1993 taxation year and receives proceeds which include $360,000 allocated to goodwill.
3.Partnership XYZ has never deducted an amount under paragraph 20(1)(b) and at the beginning of its 1993 taxation year there was no amount in its Cumulative Eligible Capital (CEC) Account.
4.The amount allocated as goodwill on the disposition by XYZ partnership of the business was an Eligible Capital Expenditure to the purchaser.
Your question is: How much is X permitted to include in its capital dividend account relating to the sale of goodwill by XYZ Partnership?
Your Analysis
1.XYZ Partnership includes $270,000 (3/4 of the goodwill proceeds) in its CEC pool by virtue of subparagraph 14(5)(a)(iv).
2.Since not all of the members of the partnership are corporations, subsection 14(1) deems the income inclusion for the negative balance in the CEC pool to be a taxable capital gain from a disposition of capital property in the amount of $270,000 rather than an inclusion in computing income from the partnership.
3.Pursuant to paragraph 96(1)(f), X, Y and Z are each allocated 1/3 of the taxable capital gain in computing their income for the year.
4.X will include $90,000 of the deemed taxable capital gain in computing its income for the year.
5.1/3 of the non-taxable portion of the goodwill proceeds allocated to X ($30,000) will be added to X's capital dividend account under subparagraph 89(1)(b)(iii). This is in accordance with the Department's position in paragraph 19 of IT-138R.
We are in agreement with the above analysis.
The foregoing comments are given in accordance with the practice of providing non-binding opinions referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990.
Yours truly,
for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental Affairs Branch
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