Principal Issues: Can a corporation make the election set out in subparagraph 13(38)(d)(iii) of the Act with respect to the sale of internally-generated goodwill in December 2016?
Position: Question of fact.
Reasons: In order to qualify for the election set out in subparagraph 13(38)(d)(iii) of the Act, a taxpayer must, among other things, satisfy the condition outlined in the preamble of subsection 13(38) of the Act, which requires the taxpayer to have incurred an eligible capital expenditure in respect of a business before January 1, 2017.
XXXXXXXXXX N. Deslandes, CPA, CGA, D. Fisc. 2016-068007 March 9, 2017
Dear Sir,
Subject: Transitional rules - New subsection 13(38) of the Income Tax Act
This is in response to your question received on December 15, 2016 and reflects our telephone discussions (XXXXXXXXXX / Deslandes) regarding new subsection 13(38) of the Income Tax Act (footnote 1).
You provided the following hypothetical scenario:
In December 2016, Corporation A sold its goodwill that it had created over the years to a person who deals at arm's length. Company A also incurred eligible capital expenditures such as incorporation costs or the acquisition of trade-marks before 2017. Corporation A's taxation year ends on April 30, 2017.
You have consulted the response to question 13 of the Canada Revenue Agency (hereafter the “CRA”) round table discussion at the 2016 Canadian Tax Foundation Annual Conference (hereafter the "Round Table"). You asked whether you can interpret this response to the effect that in a scenario such as the one presented, Company A would be able to avail itself of the election set out under subparagraph 13(38)(d)(iii) of the Act on the sale of goodwill.
Our Comments
This technical interpretation provides general comments on 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 particular transactions 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. However, we can offer you the following comments, which we hope will be of assistance.
Subsection 13(38) is one of the new provisions of the Act that contains transitional rules that apply as a result of the repeal of eligible capital property rules and the addition of the new Class 14.1 depreciable property . This provision came into force on January 1, 2017.
In general, paragraph 13(38)(d) applies where no taxation year of the taxpayer ends immediately before January 1, 2017 and an amount would have been included under paragraph 14(1)(b) (footnote 2) (a "particular amount") in computing the taxpayer’s income from the business for the particular taxation year that includes January 1, 2017, if that taxation year had ended immediately before that date.
Specifically, subparagraph 13(38)(d)(iii) of the Act allows a taxpayer to elect to include the particular amount in the taxpayer’s income from a business rather than recognizing the capital gain which would have resulted under subparagraph 13(38)(d)(ii) but for the election.
However, in order to qualify for the election set out in subparagraph 13(38)(d)(iii), a taxpayer must satisfy the condition set out in the preamble to subsection 13(38) of the Act. This requirement specifies that a taxpayer has incurred an eligible capital expenditure (footnote 3) 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). The rules set out in paragraphs 13(a) to (d) of subsection 13(38) apply, and the taxpayer may, provided all other conditions are met, file the election under subparagraph 13(38)(d)(iii).
Furthermore, we are of the view that the hypothetical scenario you submitted differs from the scenario presented in Question 13 of the Roundtable. The facts submitted as part of Question 13 indicated that the taxpayer in question had never incurred any eligible capital expenditure in respect of the business prior to 2017, in contrast to Corporation A in the hypothetical scenario. The CRA's response, therefore, was to a different set of facts.
We hope that our comments will be of assistance.
Best regards,
Danny Gagnon, CPA, CA, M. Fisc.
Interim Manager
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and
Regulatory Affairs Branch
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 R.S.C., 1985, c.1 (5th Supplement), as amended (hereinafter the "Act").
2 As that paragraph read immediately before January 1, 2017.
3 Subsection 13(41) of the Act provides, inter alia, that the expression "eligible capital expenditure" has the meaning that would be assigned to that expression if the Act read as it did immediately before 2017.