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.
Question - Sale of work-in progress
In an arm's-length transaction, Newco purchases the business assets of Oldco consisting of:
- • accounts receivable - fixed assets and equipment - work-in-progress
Consideration (the "Total Purchase Price") for these assets consists of:
- • cash - assumption of Oldco's accounts payable - an agreement to pay an amount (if any) representing the profit portion of work-in-progress existing at the sale date
It is assumed that no goodwill exists in Oldco's business, and therefore no portion of the Total Purchase Price represents an eligible capital expenditure. Newco continues to operate Oldco's business.
Will the additional payment, if any, to be made by Newco with respect to the profit portion of the work-in-progress, represent a deductible expense or a capital expenditure.
Answer
It is difficult to address a situation in which all the circumstances have not been provided. However, if the agreement to pay an additional amount is payment for the work-in-progress of Oldco, the amount of which is determined at a future point in time because it can not be easily determined at the sale date, then this additional payment will be part of the cost to Newco of the work-in-progress purchased from Oldco. The payment received by Oldco will be proceeds from the sale of its work-in-process which will be subject to the provisions of Section 23 of the Act.
If, however, it is established that these payments, are consideration for the goodwill of Opco's business, then such payments would constitute eligible capital expenditures to Newco.
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