During the current year, all of the assets of Linden Enterprises, a Canadian controlled private corporation, were sold. Among the assets was goodwill with a fair market value of $425,000. As the goodwill was internally generated, its capital cost was nil. Which of the following statements is correct?

Question

Quizplus · Accepted Answer

When goodwill is sold, it is generally treated as a capital gain for tax purposes. The capital gain is equal to the fair market value of the goodwill minus its capital cost (which is nil in this case). Therefore, the taxable capital gain is $425,000. As a Canadian controlled private corporation, Linden Enterprises is eligible to claim the capital gains deduction, which reduces the taxable capital gain by 50%. This results in a taxable capital gain of $212,500. Since the capital gain is realized by a Canadian controlled private corporation, there will be a corresponding addition to the corporation's capital dividend account of $212,500. Active business income is not affected by the sale of goodwill.

During the Current Year, All of the Assets of Linden