The CEC balance on December 31, 2016 in respect of Mr. X’s business was $75,000, equaling 75% of previously purchased goodwill and with no s. 20(1)(b) deductions having been claimed. In 2017, Mr. X transfers his business under s. 85(1) to Newco. The consideration for the goodwill, which has a value of $140,000 that consists of the assumption of a $100,000 loan and the issuance of preferred shares with a redemption amount of $40,000. Will any gain be recognized if the agreed amount for the transferred goodwill is $100,000? CRA responded:
[U]nder paragraph 13(38)(a), the total capital cost of Mr. X's property included in Class 14.1 in respect of the business was deemed to be $100,000 … .
However, by virtue of paragraph 13(38)(c) … [t]he UCC balance for Class 14.1 in respect of Mr. X’s business ... would be $75,000.
… [The] agreed amount [of $100,000] would be deemed to be the proceeds of disposition of the property tor Mr. X and the cost of the property to Newco. These proceeds of disposition would result, in the circumstances, would result in recapture of Class 14.1 depreciation in respect of Mr. X's business.
The potential adjustment by virtue of subsection 13(39) to prevent excessive recapture of the disposition of Class 14.1 property would not apply in light of the fact that the property would have been transferred to Newco pursuant to subsection 85(1). …
However, on an ultimate disposition of the goodwill by Newco, Newco could avail itself of the provisions of subsection 13(39).