16 April 1981 Income Tax Severed Letter

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.

K.R. Warren 613-593-6937

April 16, 1981

Dear Sirs:

This is in reply to your letter of October 17, 1980 concerning the timing of reporting of proceeds on the sale of eligible capital property that is subject to an earnout agreement or for which payment is deferred to subsequent periods. We apologize for the delay in our reply.

Where property is in fact eligible capital property and is sold pursuant to an agreement whereby part or all of the proceeds of disposition are subject to an earnout agreement (i.e., the proceeds are in some manner related to the future earnings generated by the property), it is our view that a strong technical argument can be made that all amounts received pursuant to the earnout are income pursuant to paragraph 12(1)(g) of the Act. However, where an earnout agreement for the sale of an eligible capital property provides for a reasonable estimated price in relation to other assets sold, and is for a reasonable period (in most cases this should not exceed five years), the Department will accept the view that only the determinable amount receivable at the date of sale must be included in the amount that "became payable" to the vendor for the purposes of section 14 of the Act. As additional amounts become determinable, they will be taken into account for purposes of section 14 at the time they are determined. As a condition to accepting this reporting treatment, the Department will consider the taxpayer not to have ceased to carry on business for purposes of section 24 of the Act until such time as all amounts under the earnout agreement have been determined. As can be seen, this method is effectively the same as the cost recovery method.

In connection with the situation where goodwill is sold and there is uncertainty as to when an amount will be paid or there is to be a delay of several years in payment, it is our position that the proceeds of disposition as determined in the year of sale are considered to constitute an amount that "became payable" for the purposes of section 14 and that a reserve is not available with respect to anticipated future receipts or with respect to an allowance for doubtful amounts. Our views with respect to the treatment of amounts that are subsequently determined to be bad is outlined in paragraphs 24 and 25 of IT-123R3 .

Yours truly,

for Director Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch

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