12 October 1995 External T.I. 9515715 - CAPITAL GAINS ELECTION - CLIENT LISTS

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:

Whether a late capital gains election can be filed in respect of a client list.

Position TAKEN:

If client list constitutes eligible capital property and if the business in which it was used was being carried on by the individual on February 22, 1994, a late capital gains election can be filed.

Reasons FOR POSITION TAKEN:

The capital gains election can be filed in respect of eligible capital property, with respect to a business carried on by the elector.

It is a question of fact whether a client list constitutes eligible capital property. It is not clear when the individual incorporated his business.

					5-951571
XXXXXXXXXX				C. Chouinard

Attention: XXXXXXXXXX

October 12, 1995

Dear Sir:

Re: Capital Gains Election - Eligible Capital Property

We are writing in response to your letter of June 5, 1995, wherein you requested our comments on the capital gains election as it applies to eligible capital property.

In the situation you describe, an individual obtained a ruling from the Department in March 1995, which provides that he is considered to be an independent contractor and not an employee. Although you state in your letter that the individual was an employee on February 22, 1994, given the Department's statement in the March 1995 letter referred to above, that the ruling regarding the individual's status is effective as of January 1, 1994, we question why you consider that the individual was an employee on February 22, 1994.

In 1994, the individual incorporated and continued to operate through his corporation. You inquire whether the client list of the individual could be considered to be an amount under "E" in the definition of "cumulative eligible capital", such that a late capital gains election could be filed in respect thereof.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request. Where the particular transactions are completed, as is the case in respect of the 1994 events, the enquiry should be addressed to the relevant Tax Services Office. Therefore, while we are unable to provide an opinion in respect of the situation outlined in your letter, we are prepared to offer the following comments.

Paragraph 110.6(19)(b) of the Income Tax Act (the "Act") 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 carried on by that person. Therefore, if client lists constitute eligible capital property, an election can be made in respect thereof. Eligible capital property is defined in section 54 of the Act to be any property which, if disposed of by the taxpayer, would result in an "eligible capital amount". According to subsection 14(1) of the Act, an eligible capital amount is an amount determined under subsection 14(5) of the Act, which is an amount resulting from a disposition of property where, if any payment had been made after 1971 by the taxpayer for that property, such payment would have qualified as an "eligible capital expenditure" for the business. Therefore, the client list will be eligible capital property if, had the individual made a payment to acquire the client list, such payment would have been an eligible capital expenditure to the individual. Whether the amount would have been an eligible capital expenditure in the hands of the individual, had he made the payment, is a question of fact. However, a capital outlay made to acquire a client or customer list for use in a business of a taxpayer would generally be considered an eligible capital expenditure.

In addition, you should note that if the individual incorporated prior to February 22, 1994, the capital gains election could not be filed by the individual, since the capital gains election can be filed in respect of eligible capital property only where it is with respect to a business carried on by the individual filing the election. If the corporation was in existence on February 22, 1994, the corporation, as opposed to the individual, would be considered to be carrying on the business.

As regards your comments with respect to the transfer of the client list to a corporation, given that the individual incorporated his business in 1994, in our view, the client list cannot be transferred to a corporation unless it can be divorced from the business itself. In this respect, we refer you to paragraph 6 of Interpretation Bulletin IT-143R2 which states in part that "goodwill cannot be divorced from the business itself. It follows the business and may be sold with the business, but it cannot be sold separately". This statement would suggest that if the client list is goodwill, it cannot be sold separate and apart from the rest of the assets of the business. On the other hand, if the property can be divorced from the business, then it is likely not goodwill, as described in Interpretation Bulletin IT-143R2. Paragraph 8 of IT-143R2, which deals separately with customer lists and ledger accounts, implies that there is a distinction between such assets and goodwill. Furthermore, Interpretation Bulletin IT-187 contemplates the sale of customer lists with or without the business of the vendor. Therefore, if the property transferred by the individual to a corporation is a client list and not goodwill, it should be capable of being sold separately from the rest of the business.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch