Section 24

A taxpayer acquired franchise rights which subsequently became worthless as a result of the bankruptcy of the franchisor. However, it continued to carry on the same business. In noting that there was no disposition permitting the recognition of a loss, CRA stated (TaxInterpretations translation):

The mere reduction (partial or complete) of the value of an eligible capital property does not by itself produce tax consequences. ...

Where there is a disposition of eligible capital property and the CEC balance is positive after this disposition, that positive balance may be deducted from the business income of the year in which the taxpayer ceased carrying on the business in accordance with subsection 24(1).

In one of the alternative scenarios for the sale of the client list of a retiring professional, the sale price is 25% of the fees earned over the next four years from the transferred clients, but with a $400,000 maximum amount (and no minimum).

CCRA indicated that s. 12(1)(g) would not apply if the $400,000 maximum amount equals the fair market value of the property at the time of the sale, even though this maximum may subsequently be reduced in the event that the total fees collected over the four years do not reach this maximum. In this situation, s. 14 would apply, so that the $400,000 sale price would be included in para. (a) of E of the CEC in the taxation year of the sale of the client list, given that there is a possibility that the vendor may be able to claim this amount. If (in the 4^th year) a definitive reduction in the sale price becomes established, the CEC will become positive and, if the taxpayer no longer owns eligible capital property and has ceased carrying on the business, s. 24(1)(a) would allow the taxpayer to deduct the CEC.

Where a taxpayer ceased carrying on a distributing business upon the collapse of the underlying franchisor, it will be a question of fact whether the distribution rights are of no value and whether the taxpayer has any recourse against the franchisor.

Regarding a query on the interaction between ss. 14(3) and 24(2) on a transfer of goodwill and an entire business by an individual to a corporation controlled by the individual, CRA stated:

[I]n general, where the conditions for the application of subsection 14(3) are satisfied, subsection 14(3) takes precedence over the application of subsection 24(2), because of the opening words of that subsection: "Notwithstanding any other provision of this Act.... ". However, we would need to consider a specific situation … before making a final determination.

Neither s. 24(2) nor s. 70(5.1) is elective, and there is no provision permitting the deemed receipt of fair market value proceeds.