Dealing with goodwill

Goodwill can be “eligible capital property” under the Income Tax Act, explains Greer Jacks in this second of two parts on goodwill.

If you are making strategic deductions from eligible capital property during the year, understanding the concept and workings of goodwill can put more dollars in your pocket.

As explained in part one, goodwill is a flexible concept. There is no definition of goodwill in the Income Tax Act; so, we are left largely with common-law, judicial pronouncements as to its use, availability and boundaries. But when it comes to intangible capital property such as customer lists, franchises and goodwill in general, the Act is specific. Subsection 14(5) of the Act qualifies goodwill as eligible capital property that is deductible under a system similar to the capital cost allowance system.

So, if a business has outstanding capital losses to be used and wants to conserve the remaining cumulative eligible capital pool balance, the taxpayer might elect to remove a particular asset from the capital pool and recognize a capital gain on it in that year as if it were a non-depreciable capital property. In that case, three-quarters of the “eligible capital expenditure” is added to the “cumulative eligible capital” of the taxpayer, and the taxpayer is permitted a deduction from income of up to 7% of cumulative eligible capital at the end of the year pursuant to Section 20(1)(b) of the Act.

However, this election can only be used to recognize gains — not losses — and is not available for property for which the original cost cannot be determined. This last criterion poses hurdles for disposing of goodwill, but they are not insurmountable. 

Greer Jacks is updating jurisprudence in EverGreen Explanatory, an online research library of assistance to tax and financial professionals in working with their clients.