I’m looking for guidance on the deferred tax implications (DTL/DTA) in a (Canadian) acquisition scenario involving goodwill.
Context: Assume a target company has an existing tax pool related to goodwill in Class 14.1 under the Income Tax Act (Canada) (i.e., remaining UCC balance). The target is then acquired through a share purchase and on consolidation new accounting goodwill is recognized based on PPA calculations.
Question: What happens, from a deferred tax perspective, to the pre-existing unused tax basis (goodwill UCC in 14.1) in the target? Since the historical accounting goodwill is effectively replaced by newly recognized goodwill on acquisition (i.e., old book value disappears under acquisition accounting), how should the temporary difference be calculated?
- Does the legacy UCC continue to support a deductible temporary difference even though the related accounting goodwill no longer exists? Since new goodwill has effectively nil tax basis value , this would create a DTA?
- Or is this creating a taxable temporary difference (DTL) tied to the newly recognized goodwill?
Any insights, even for taxes treatment of goodwill and business combinations not in Canada, would be appreciated.