The Country Pie is a highly recognized baker of quality pies in Beamsville, Ontario. The current proprietor, Rudolph Strudel, started the business about 20 years ago with an initial purchase of equipment of $150,000 and built up the name of the company by closely supervising the pie production process. Many have said that it is this attention and his recipes that have made the business a success. Rudolph has decided to sell his business and move to the coast to get away from the pressures of running a business. An offer has been made for the assets of The Country Pie by Big Food Corporation Ltd. ("BFC"). There was a meeting of the minds as to the value of the fixed assets of The Country Pie. However, there was considerable dispute as to the value of The Country Pie name in generating pie sales after a purchase by BFC. Consequently, it is proposed that the full proceeds be determined in part by future sales.
The BFC offer is for $50,000 cash; $60,000 to be paid on the basis of sales over the next three years with any balance of the $60,000 remaining at the end of the third year payable at that time; and 25% of gross sales in the next five years. As part of the agreement, Rudolph would provide consulting services to BFC as needed during the next three years.
REQUIRED
Discuss the income tax implications to Rudolph of the proposal from BFC.