Principal Issues: If a corporation has incurred an eligible expenditure in respect of a business before January 1, 2017, can the corporation make the election set out in subparagraph 13(38)(d)(iii) of the Act with respect to the sale of internally-generated goodwill?
Position: Question of fact.
Reasons: See below.
XXXXXXXXXX 2016-068014 K. Robinson March 27, 2017
Dear XXXXXXXXXX:
Re: Transitional Rules – Subsection 13(38) of the Income Tax Act
This is in response to your correspondence dated December 15, 2016, wherein you requested our views on the application of subsection 13(38) of the Income Tax Act (“Act”) to a particular fact situation that in your view differs from those in the Canada Revenue Agency’s response to Question 13 (“Q13”) at the 2016 Canadian Tax Foundation roundtable session. Your specific question is best illustrated with the following hypothetical scenario:
- In December 2016, a corporation sells its internally-generated goodwill to an arm’s length purchaser.
- Prior to 2017, the corporation had incurred eligible capital expenditures in respect of the business, such as incorporation costs.
- The corporation’s tax year ends on April 30, 2017.
Specifically, you are asking whether the election in subparagraph 13(38)(d)(iii) of the Act would be available to the corporation in the hypothetical scenario described above.
Our Comments
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of a particular transaction proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
Subsection 13(38) is one of the new provisions of the Act which contain the transitional rules that apply as a result of the repeal of the eligible capital property rules and the addition of Class 14.1 depreciable property. This provision came into force on January 1, 2017.
In general, subsection 13(38) applies if no tax year of the taxpayer ends immediately before January 1, 2017 and the taxpayer would have had a particular amount included, because of paragraph 14(1)(b) (footnote 1), in computing the taxpayer’s income from the business for the particular tax year that includes January 1, 2017 if the particular year had ended immediately before that day.
Pursuant to subparagraph 13(38)(d)(iii) of the Act, a taxpayer may elect to treat the capital gain in subparagraph 13(38)(d)(ii) as an income inclusion under paragraph 14(1)(b) in respect of the business, if several conditions are met. One of the conditions, set out in the preamble of subsection 13(38), states that the subsection will only apply if a taxpayer has incurred an eligible capital expenditure (footnote 2) in respect of a business before January 1, 2017.
In our view, a taxpayer who has incurred any eligible capital expenditure in respect of the business prior to 2017 has met the condition set out in the preamble of subsection 13(38) of the Act. Therefore, paragraphs (a) to (d) of subsection 13(38) apply and the taxpayer may, provided that all other conditions are met, file the election under subparagraph 13(38)(d)(iii).
Therefore, our response to the hypothetical scenario described above can be distinguished from our response to Q13 since in that situation the taxpayer in question had never incurred any eligible capital expenditure in respect of the business prior to 2017.
We trust that these comments will be of assistance.
Yours truly,
Michael Cooke, CPA, CA
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 This paragraph is to be read as it did immediately before 2017.
2 Subsection 13(41) of the Act stipulates, among other things, that the expression “eligible capital expenditure” has the meaning that would be assigned to the expression if the Act read as it did immediately before 2017.