Principal Issues: Since January 1, 2017, whether a corporation may, pursuant to paragraph 111(4)(e), designate goodwill that was a property of the taxpayer immediately before the corporation is subject to a loss restriction event.
Position: Yes.
Reasons: Since January 1, 2017, goodwill is a depreciable property of class 14.1 and therefore, it is a capital property. In the situation described, no amount would, but for paragraph 111(4)(e) be required by paragraph 111(4)(c) to be deducted in computing its adjusted cost base to the taxpayer and the goodwill is not, in the present situation, a depreciable property of a prescribed class to which, but for paragraph 111(4)(e), subsection 111(5.1) would apply. Therefore, in the present situation, the conditions to designate an amount with respect to the goodwill are met.
APFF FEDERAL TAX ROUNDTABLE 6 OCTOBER 2017
APFF CONFERENCE 2017
Question 15
Acquisition of control and paragraph 111(4)(e) designation
All of the shares of a corporation are sold to an unrelated third party. The corporation is therefore subject to the loss restriction rules under paragraph 251.2(2)(a) applicable to an acquisition of control. The only asset of the corporation that has a higher fair market value than its capital cost is its goodwill. Upon the sale of the corporation’s shares, the fair market value of its goodwill was valued at $200,000.
On the acquisition of control, the corporation had a balance of unapplied net capital losses. Under subsection 111(4), this balance cannot be applied against capital gains generated subsequent to the acquisition of control. In order to avoid the loss of this tax attribute, the corporation can make the designation provided in paragraph 111(4)(e), which permits the corporation to designate property that is capital property in order to trigger the unrealized capital gains on that property and thereby use all or part of its balance of unapplied net capital losses. As a result of the recent legislative amendments respecting the replacement of the eligible capital property regime by the Class 14.1 depreciable property, we understand that goodwill is now depreciable property and meets the definition of capital property in section 54.
Question to the CRA
Is the CRA of the view that following the addition of Class 14.1 depreciable property, a corporation may make a designation provided in paragraph 111(4)(e) respecting the goodwill of the corporation that has a capital cost of $0 and a FMV of $200,000?
CRA Response
Since January 1, 2017, goodwill relating to a business is Class 14.1 depreciable property. Consequently, it is capital property and, based on the facts set out above, was owned by the corporation immediately before the corporation was subject to a loss restriction event. In addition, according to the facts provided, the goodwill is not a depreciable property to which subsection 111(5.1) would apply in the absence of paragraph 111(4)(e), and no amount would be deductible under paragraph 111(4)(c) in the absence of paragraph 111(4)(e).
Therefore, the corporation can designate the goodwill in accordance with paragraph 111(4)(e). Thus, the corporation would be deemed to have disposed of the goodwill, immediately before the time that is immediately before the time that the corporation was subject to a loss restriction event, for proceeds of disposition equal to the lesser of:
- the fair market value of the property immediately before the time the corporation was subject to the loss restriction event; and
- the adjusted cost base to the taxpayer of the property immediately before the disposition or, if greater, the amount that is designated by the taxpayer in respect of the property.
In this situation, the corporation should determine the fair market value of the property so as to compare it with the designated amount for the property (if greater than the adjusted cost base) so as to establish the proceeds of disposition of the property.
Sylvie Labarre
October 6, 2017
2017-070914