Goodwill of a business was purchased in 2016 for $100,000, resulting in a cumulative eligible capital balance on December 31, 2016 of $75,000 (i.e., 75% of $100,000) ignoring any s. 20(1)(b) amortization deductions. The business owner (Mr. X) now wants to roll the business into a Newco under s. 85(1), electing at $100,000 (which, in the posited example, equals the non-share consideration in the form of a loan to be assumed by Newco).
CRA indicated that this elected amount would produce $25,000 in recapture of depreciation, stating:
[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.
CRA went on to indicate that s. 13(39), which might otherwise increase the undepreciated capital cost by $25,000 on this disposition, does not apply where s. 85(1) applies to the disposition.