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.
August 17, 1982
WINNIPEG DISTRICT OFFICE
HEAD OFFICE Non-Corporate Rulings Division Wm. R. McColm (613) 995-2455 B-3712
J.K. Lawton Audit Review
Subsection 14(1) Income - Whether Active or Non-Active -----------------------------
This is in reply to your memo of July 28, 1982 concerning the above matter.
We have reviewed the issue raised in your memo and are of the opinion that the sale of goodwill that occurred in connection with the sale and cessation of the taxpayer's entire business would not produce income that is considered to be active business income, although the matter is not free from doubt.
The relevant words in subsection 14(1), "from that business", are considered to refer to amounts generated in the course of the business. Such an amount arising in connection with the sale of the business is thought to fall outside this phrase and thus is not considered to be ancillary to the activities involved in carrying on the business. This nay be subject to an exception along the lines suggested in paragraph 7 of IT-73R3 . For example, if the business had purchased goodwill, had written off part of it against active business income and later recovered this amount on the sale of the goodwill with the business, the amount recovered could be considered to be an adjustment of active business income earned in prior years. It nay be suggested that goodwill accrues over the life of the business and is part of the active business income earned annually "from that business", although it is realised only on the eventual sale of the business. However, this is not our view.
The other alternative suggested is that income realised on the sale of goodwill along with the entire business is Canadian investment income. It is our view that income arising in such circumstances is not Canadian investment income. Subsection 129(4) defines Canadian investment income as the aggregate of (i) taxable capital gains and (ii) income "from a specified investment business carried on by it in Canada". Income arising from the sale of goodwill is definitely not a taxable capital gain. Nor do we think that it is income "from a ... business" (this phrase was discussed above in connection with subsection 14(1)).
We trust that these comments may be of assistance.
for Director Non-Corporate Rulings Division
14(1), 125(1)
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