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.
Principal Issues:
1.Whether a sole practitioner can file a capital gains election in respect of the goodwill of the practice.
2.Whether partners in a partnership can file a capital gains election in respect of the goodwill of the partnership.
3.Alternatively, whether partners in a partnership can increase the adjusted cost base of their partnership interests by an amount equivalent to their share of the partnership's goodwill.
Position TAKEN:
1.Election can be filed.
2.Election cannot be filed in respect of goodwill of partnership.
3.Partners cannot increase adjusted cost base of partnership interests by amount of goodwill.
Reasons FOR POSITION TAKEN:
1.A capital gains election can be filed in respect of all the eligible capital property owned by the person filing the election, in respect of a business of that person.
2.A capital gains election can be filed in respect of all the eligible capital property owned by the person filing the election, in respect of a business carried on by that person, otherwise than as a member of a partnership. Each partner may, however, file an election in respect of his or her partnership interest.
3.For purposes of determining a partner's gains accrued to February 22, 1994, the adjusted cost base of a partnership interest can be adjusted to take into consideration the income or loss of the partnership for the period up to February 22, 1994. Goodwill does not constitute income or loss of a partnership.
5-942854
XXXXXXXXXX C.Chouinard
Attention: XXXXXXXXXX
January 4, 1995
Dear Sir:
Re: Goodwill - Capital Gains Election
We are writing in reply to your letter of November 1, 1994, wherein you requested our comments regarding the application of the proposed capital gains election as regards goodwill of a professional practice operated by, on the one hand, a sole practitioner, and on the other hand, a partnership of two practitioners.
More specifically, you ask whether a capital gains election can be filed in respect of the goodwill of the practice by the sole practitioner or the partners, as the case may be. In addition, you ask whether, instead of making the capital gains election, the partners of a partnership can increase the adjusted cost base of their partnership interests in an amount equivalent to their share of the goodwill of the partnership.
As regards the situation with the sole practitioner, paragraph 110.6(19)(b) of the November 24, 1994 legislation (the "draft legislation") provides that an election can be made in respect of all the eligible capital property owned by the person filing the election, in respect of a business of that person. Therefore, since goodwill constitutes eligible capital property, an election can be made by a sole practitioner in respect of the professional practice. Where such an election is filed, the taxable capital gain realized on the election is added to a special account, the "exempt gains balance", defined in subsection 14(5) of the proposed legislation. Any capital gain subsequently realized on a disposition of eligible capital property may be reduced by the balance of the amount in the "exempt gains balance" account, thus reducing the amount of tax payable, if any, on the capital gain.
Where, however, two practitioners operate their professional practice as a partnership, they cannot file a capital gains election in respect of the goodwill of the partnership, as is made clear by the wording of paragraph 110.6(19)(b), which applies to all eligible capital property of "a business carried on by the elector, otherwise than as a member of a partnership". Each partner may, however, file an election in respect of his or her partnership interest. Subject to the penalty provisions, if such an election is filed by an individual, he or she will be deemed to have disposed of his or her partnership interest for proceeds of disposition equal to the greater of the amount designated in the election or the adjusted cost base of the partnership interest, as adjusted under subsection 110.6(23) of the draft legislation. This will give rise to a capital gain to the extent the elected amount exceeds the adjusted cost base of the individual's partnership interest. However, the deemed capital gain does not give rise to a bump-up of the cost of the partnership interest by virtue of clause 110.6(19)(a)(ii)(A) of the proposed legislation. Instead, the capital gain is added to a special account defined in subsection 39.1(1) of the proposed legislation as the "exempt capital gains balance". This account can be used for any taxation year that ends before 2005, to shelter both capital gains that may arise on a future disposition of the partnership interest by the individual and capital gains that are flowed out to the individual by the partnership in respect of the individual's interest in the partnership.
Where an election is filed in respect of a partnership interest, subsection 110.6(23) of the draft legislation permits certain adjustments to be made to the adjusted cost base of a partnership interest, to ensure that the income or loss of the partnership, for the period up to February 22, 1994, that is reflected in the value of a partnership interest on that day, but that would otherwise not be reflected in the adjusted cost base of a partnership interest until the end of the fiscal period, will be taken into consideration for the purpose of determining the member's gains accrued to February 22, 1994. Since goodwill is neither income or loss of the partnership, the value of the goodwill of the partnership could not be added to the adjusted cost base of the partnership interests, as you suggest.
We trust that these comments will be of assistance.
Yours truly,
R.A. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch
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