14 December 1995 External T.I. 9529255 - INTERNATIONAL SHIPPING-GAIN FROM DISPOSITION OF GOODWILL

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 gain from the disposition of goodwill, on the sale of an international shipping business the income from which is exempt from taxation in Canada under paragraph 81(1)(c) of the Act, is subject to tax under the Act.

Position:

The disposition of goodwill associated with such business generally gives rise to taxable capital gain. However under proposed 115(1)(b)(ii) the property used in an international shipping business is excluded from the definition of taxable Canadian property provided the requisites for that exclusion are otherwise satisfied.

Reasons:

Please see letter.

XXXXXXXXXX 952925

Attention: XXXXXXXXXX

December 14, 1995

Dear Sirs:

Re: Disposition of Goodwill by International Shipping Corporation

This is in response to your letter dated November 16, 1995. You request the Department's view whether a realization of goodwill on a disposition of an international shipping business, the business income from which is exempt from taxation under Part I of the Income Tax Act (the "Act") under paragraph 81(1)(c) thereof, can give rise to income that is not exempt from tax under the Act.

It is our view that an amount received by a non-resident corporation in respect of goodwill on the disposition of a business which earns income described in paragraph 81(1)(c) of the Act would not be included in income under paragraph 14(1)(b) of the Act as the consideration received by the non-resident corporation in respect of the disposition is not included under paragraph E(a) of the definition of "cumulative eligible capital" in subsection 14(5) of the Act. This is so because had the consideration given by the non-resident corporation (i.e. the goodwill) been paid for by the non-resident corporation, the payment would not have been an "eligible capital expenditure" also as defined in subsection 14(5) of the Act, as it would have been incurred for the purpose of gaining or producing income that is exempt income.

In these circumstances, goodwill is not an eligible capital property as defined in section 54 of the Act and the disposition thereof may produce a capital gain as defined in paragraph 39(1)(a) of the Act. Assuming that the goodwill has no cost to the non-resident corporation, a taxable capital gain would be computed under paragraph 38(a) of the Act in an amount equal to 3/4 of the proceeds of disposition.

It is the Department's position that paragraph 81(1)(c) of the Act is inapplicable to taxable capital gains. However, proposed clause 115(2)(b)(ii)(B) of the Act applicable after April 26, 1995 would exclude from the definition of taxable Canadian property, ships and aircraft used principally in international traffic and personal property pertaining to the operation of such ships or aircraft, if the country in which the non-resident person is resident grants substantially similar relief for the year to a person resident in Canada. In our view goodwill would be considered personal property for the purposes of that proposed provision.

We trust that the above is the information you require.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch