7 October 1990 Income Tax Severed Letter - 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.

Dear Sirs:

Re: Application of Sections 14, 25 and 85 of the Income Tax Act (the "Act")

We are writing in response to your letter of April 26, 1990 in which you requested our comments regarding the application of the above-noted sections of the Act to the following hypothetical situation:

"Mr. A, a proprietor of a business with a regular fiscal period ending on January 31 each year, decides to incorporate his business on August 31, 1989. Included in the sale of assets on that date is goodwill with a fair market value of $100,000. His cumulative eligible capital, within the meaning of paragraph 14(5)(a), prior to the sale is nil. No amount has ever been claimed by Mr. A under paragraph 20(1)(b).

On August 31, 1989, Mr. A sells the goodwill to his new company, which has selected a July 31 year-end, under the rollover provisions of section 85 with the "agreed amount" being $50,000. The taxpayer utilizes the section 25 election procedure to defer the T1 reporting of his proprietorship's business income, earned in the period February 1, 1989 to August 31, 1989 until calendar 1990."

You have requested our comments on the following questions regarding this hypothetical situation:

• 1. What is the date by which the section 85 election form T2057 must be filed, without incurring penalties? Is it April 30, 1990 or January 30, 1991? 2. In which calendar year, 1989 or 1990, should the taxpayer report the taxable capital gain that is deemed to arise under subparagraph 14(1)(v)?

Comments

With regard to your first question, subsection 85(6) of the Act requires that an election made under subsection 85(1) of the Act "... be made on or before the earliest of the days on or before which any taxpayer making the election is required to file a return of income pursuant to section 150 of the Act for the taxation year in which the transaction to which the election relates occurred."

Pursuant to paragraphs 249(1)(a) and (b) of the Act, respectively, the taxation year of a corporation is its fiscal period and that of an individual is a calendar year. As a result, paragraph 150(1)(a) of the Act will require that Mr. A's corporation file such return within 6 months from July 31, 1990 (i.e. on or before January 31, 1991), while paragraph 150(1)(d) of the Act will require that Mr. A file such return on or before April 30, 1990. Therefore, the date that the elections made pursuant to subsection 85(1) of the Act must be filed on or before is April 30, 1990.

Subsection 25(1) of the Act permits an individual proprietor who has disposed of his business to elect to have the fiscal period in which the disposition occurred end at the time at which it would have ended had there been no disposition. Where this election has been made, subsection 25(3) of the Act provides that paragraph 24(1)(d) thereof does not apply, such that the inclusions in income which arise on the disposition of eligible capital property after the business has ceased will be included in income for the extended fiscal period.

In your hypothetical situation, after Mr. A has made an election pursuant to subsection 25(1) of the Act, the last fiscal period for the proprietorship will be deemed to end on January 31, 1990. The answer to question 2 is, therefore, that the amount to be included in income from the disposition of the goodwill (which amount is deemed by subparagraph 14(1)(a)(v) of the Act to be a taxable capital gain) is to be reported in 1990 by Mr. A.

As stated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, the opinions in this letter are not rulings and are consequently not binding on the Department.