1 April 1998 External T.I. 9704835 - GOODWILL, DEATH AND THE CAP GAIN ELECTION

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:

loss of the expected benefit from an exempt gains balance when the FMV of the goodwill at the time of disposition is less than the amount designated in the 110.6(19) election, when the property is transferred in circumstances such that 24(2) or 70(5.1) apply

Position:

referral to Finance

Reasons:

the automatic rollover of goodwill on death precludes the use of the exempt gains balance of the deceased so that the benefit which was expected upon making the election in 94 is lost

970483
XXXXXXXXXX A. Humenuk

Attention: XXXXXXXXXX

April 1, 1998

Dear XXXXXXXXXX

Re: Goodwill, Exempt Gains Balance and Death

This is in reply to your letter of February 14, 1997, in which you ask for our comments on the interrelationship between the provisions of the Income Tax Act (the "Act") relating to a capital gains election made in respect of goodwill and the provisions of the Act relating to the transfer of goodwill upon death. We apologize for the delay in responding.

In the situation you describe, a sole proprietor filed an election under subsection 110.6(19) of the Act in respect of the goodwill relating to his business. When he died in December 1994, the assets of the business were not distributed to the spouse who was the sole beneficiary of his estate. Instead, the spouse operated the business as executrice of the estate until the business was sold in 1996. The income from the business and capital gain from the disposition of the business by the estate were reported in testamentary trust returns for each of the applicable years.

Your analysis indicates that the exempt gains balance created by the deceased’s capital gains election cannot be used to shelter the amount included in estate’s income under section 14 of the Act as a result of the disposition of the business, nor can an eligible capital amount be deemed to have been received by the deceased upon death. The purpose of such a deemed receipt would be to utilize the deceased’s exempt gains balance and to provide the estate with a deemed eligible capital expenditure in respect of the goodwill of the business. However, the operation of subsection 24(2) of the Act (or subsection 70(5.1) of the Act when the property is not transferred to a spouse) precludes any recognition of the fair market value of goodwill upon death. As there is no provision to opt out of the operation of subsection 24(2) or 70(5.1) of the Act, the benefit of the exempt gains balance created by a capital gains election is lost on the death of the proprietor and any amount received by the estate or a beneficiary on the sale of goodwill would be fully taxable to the estate or beneficiary as the case may be.

We agree with your analysis of these provisions and have referred the matter to the Department of Finance. We will contact you again when we have heard back from them.

Yours truly,

P. Spice
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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