5 November 2010 External T.I. 2010-0383891E5 - Purchase of Common Shares of a Corporation

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.

Principal Issues: Can the corporation record goodwill on a share purchase? If the assets of the corporation are subsequently sold can the cost of these assets be adjusted by the purchase price of the common shares?

Position: No and No

Reasons: Legislation

XXXXXXXXXX
									2010-038389
									S. D'Angelo
									(613)952-5803
November 5, 2010

Dear XXXXXXXXXX :

Re: Purchase of Common Shares and Goodwill:

This is in response to your fax dated October 15, 2010 inquiring whether the cost of the common shares can be utilized in order to reduce the capital gains on the disposition of capital assets. Our understanding of the situation is as follows:

• The taxpayer purchased 100% of the common shares of a Corp A, a Canadian Controlled Private Corporation (CCPC), for $XXXXXXXXXX.
• Corp A operates XXXXXXXXXX fast food restaurants in the greater XXXXXXXXXX area with each having a fair market value of $XXXXXXXXXX .
• The net assets of Corp A consist solely of depreciable property having an undepreciated capital cost (UCC) of $XXXXXXXXXX .
• Subsequent to the purchase of the common shares of Corp A, the taxpayer has decided to sell some or all of the assets of Corp A to an arms-length third party.

Given that the purchase price of Corp A's shares exceed the UCC of the net assets of Corp A by $XXXXXXXXXX , you have asked whether the taxpayer can treat the $XXXXXXXXXX as goodwill (i.e., an eligible capital expenditure) for income tax purpose. You also want to know if the taxpayer decides to sell the net assets of Corp A, whether the cost of these assets can be adjusted by allocating the $XXXXXXXXXX excess to purchase price of those assets.

Our Comments

The situation outlined in your fax appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the Canada Revenue Agency (CRA) website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

Generally, goodwill arises as a recognizable asset only when the business is acquired at a price in excess of the value, as a going concern, of its net assets. Where this is the case, the consideration given for the goodwill, as well as any legal and accounting fees that can be directly associated with the purchase of the goodwill will qualify as an eligible capital expenditure as defined in subsection 14(5) of the Act.

The purchase of all the common shares of Corp A by the taxpayer is a single transaction representing the acquisition of shares. No eligible capital property has been acquired by the taxpayer under these circumstances and as such Corp A will not be able to record any amount of the excess (i.e., the $XXXXXXXXXX ) as an eligible capital expenditure for income tax purposes or deduct any amount under paragraph 20(1)(b) of the Act as a cumulative eligible capital amount. Moreover, it would not be possible in these circumstances to allocate such amount to the cost or capital cost of the depreciable property owned by Corp A. For additional information on eligible capital expenditures, please refer to Interpretation Bulletin IT-143R3, Meaning of Eligible Capital Expenditure.

We trust our comments will be of assistance.

Yours truly

S. Parnanzone
Manager
For Director
Business and Partnership Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch