| 19(1) | File No. 5-8650 |
| D. Turner | |
| (613) 957-2094 |
January 18, 1990
Dear Sirs:
Re: Eligible Capital Amounts
We are writing in reply to your letter of August 29, 1989 regarding the Income Tax treatment of eligible capital amounts.
In your letter you outline a hypothetical situation in which a partnership receives proceeds of $100,000 from the disposal of goodwill during its fiscal year ended March 31, 1989. The partnership is comprised of two partners, an individual and a Canadian Controlled Private Corporation ("CCPC") which also has a fiscal year end of March 31. You requested our comments related to the following questions:
1. What is the inclusion rate at the partnership level?
2. What is the flow through at the corporate level?
3. Is the income active or investment income to the corporation?
4. Is the untaxed portion of the "gain" credited to the corporation's capital dividend account?
5. Is the taxable capital gain to be reported on T2S(1), T2S(6), and/or T2S(7)?
OUR COMMENTS
Our comments are based on the assumptions that the partnership's cost of the goodwill was nil and that it had no other current or prior transactions to which section 14 of the Income Tax Act (the "Act") would apply. Based on these assumptions, our comments related to the above questions are as follows:
1. In our opinion, a partnership is a taxpayer for the purposes of section 14 of the Act and in order to determine a taxpayer's inclusion rate, it is necessary to determine the taxpayer's "adjustment time". In the case of a partnership, subparagraph 14(5)(c)(iii) of the Act states that the "adjustment time" is the time immediately after the commencement of the partnership's first fiscal period commencing after 1987 in respect of the business. This results in the above partnership having an "adjustment time" commencing March 31, 1988, as such, the above transactions all occurred after the partnership's "adjustment time" and subparagraph 14(5)(a)(iv) of the Act will apply,, causing the inclusion rate to be 75%.
2. The flow through rules contained in paragraph 96(1)(f) of the Act would result in a flow through to the corporation of 75% as a taxable portion of the gain in accordance with subparagraph 14(1)(a)(v) of the Act leaving 25% as the non-taxable portion of the gain.
3. In the above situation, subparagraph 14(1)(a)(v) and paragraph 96(1)(f) of the Act would deem the flow through amount to be a taxable capital gain of the CCPC from a disposition of capital property by him in the year.
4. In the above situation, the untaxed portion of the "gain" would be credited to the CCPC's capital dividend account pursuant to the calculation in subparagraph 89(1)(b)(iii) of the Act. A review of the calculation indicates that, based on all transactions occurring after the "adjustment time" and the above assumptions, only clause 89(1)(b)(iii)(B) of the Act would be applicable and it would result in the inclusion of $25,000 (1/3 * 75% * $100,000) in the CCPC's capital dividend account.
5. Assuming 100% of the gain has been included in income for financial statement purposes, the 100% amount should be deducted on the T2S(1) as a capital gain on disposition of eligible capital property and an amount representing the 75% taxable capital gain on disposition of capital property should be added on the T2S(1). The T2S(6) and T2S(7) forms would not be used in the above situation, however, a new form T2S(8A) is now available at District Taxation Offices and may be used for calculations related to eligible capital property.
The above comments apply only where the partnership is a Canadian partnership and is comprised of an individual and a CCPC.
R.E. Thompsonfor DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch