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Business -> Eligible Capital Property

Eligible Capital Property (ECP), Eligible Capital Expenditures (ECE) and Cumulative Eligible Capital(CEC) Deduction

Income Tax Act s. 20(1)(b), Schedule II Class 14.1, former s. 14(5), 54 & 248(1) definitions re EC (repealed)

The Federal 2016 Budget repealed the then-current tax treatment of eligible capital property (ECP), and replaced it with a new capital cost allowance (CCA) class, and provided rules to transfer taxpayers' existing cumulative eligible capital (CEC) pools to the new CCA class.  This proposal was not intended to affect the application of the Goods and Services Tax/Harmonized Sales Tax (GST/HST) in this area.  See the information at the bottom of the page re the proposed changes.

As per the March 21, 2016 Notice of Ways and Means Motion, the new CCA class is Class 14.1, and has a rate of 5%.  However, for eligible capital expenditures incurred before 2017, the rate will be 7% for the first 10 years.  Also for the pre-2017 expenditures, taxpayers will be allowed to deduct as CCA the greater of $500 per year and the amount otherwise deductible.  This additional deduction will be available for taxation years that end prior to 2027.

Some examples of eligible capital property are goodwill, trademarks, and some patents, which are considered intangible assets.  The costs incurred to buy these assets are called eligible capital expenditures.  Costs incurred for incorporation, reorganization or amalgamation also qualify as eligible capital expenditures.  See CRA Folio S4-F7-C1, Amalgamations of Canadian Corporations  paragraph 1.96 re amalgamation expenses.

Incorporation Costs After 2016

As per the 2016 budget, in order to reduce compliance burdens in respect of incorporation expenses, a separate business deduction is provided (new s. 20(1)(b)) so that the first $3,000 of incorporation expenses are expensed rather than added to a CCA class.  Incorporation expenses in excess of $3,000 will be included in new Class 14.1.  This measure applies as of January 1, 2017, for expenses incurred in 2017 and later years.

Increased Tax Cost For CCPCs Under New Rules

The tax cost to CCPCs related to disposal of eligible capital property will be higher under the new rules.  For any small business owners considering disposing of the assets of a small business with significant goodwill, thought should be given to selling those assets prior to the end of 2016.  When the sale of the corporation is done by a sale of shares, the new ECP rules will have no effect on the tax cost of the sale.  However, many purchasers of a business prefer to buy the assets, including goodwill, rather than the shares.  Professional tax advice should be sought, as this can be a complicated issue.  Gowlings has a good article on the Proposed Replacement of Eligible Capital Property Rules by New Depreciable Property Class - scroll down the article to Impact of the Proposed Rules.

Tax Treatment of Eligible Capital Property Prior to 2017

Eligible capital expenditures cannot be deducted in full, and are not eligible for capital cost allowance (CCA).  They may qualify for a partial deduction called a cumulative eligible capital deduction.

When eligible capital property is purchased, in most cases 75% of the cost is recorded in a "cumulative eligible capital (CEC) account".    This is an account which tracks, for tax purposes, your eligible capital property acquisitions and dispositions.  7% of the balance of this account can be deducted from income each year.

Canada Revenue Agency (CRA) Resources

Income Tax Interpretation Bulletin IT143R3 (Archived) - Meaning of Eligible Capital Expenditure

Eligible Capital Expenditures - Sole Proprietors and Partnerships

T4002 Self-employed Business, Professional, Commission, Farming and Fishing Income Guide - See Chapter 5 Eligible Capital Expenditures - calculation of eligible capital deduction for self-employed sole proprietors or partnerships.

T2 Corporation Income Tax Guide (T4012), T2 return

Changes re Eligible Capital Property

The Federal 2014 Budget announced a public consultation on a proposal to repeal the existing eligible capital property (ECP) regime, replace it with a new capital cost allowance (CCA) class available to businesses, and transfer taxpayers' existing cumulative eligible capital (CEC) pools to the new CCA class.  The Federal 2016 Budget effected these changes beginning January 1, 2017.  For more detail on the changes, see Eligible Capital Property on the 2016 Budget website.

Under the 2014 Federal Budget changes, expenditures that were currently added to CEC at 75% of their cost would be included in a new CCA class at 100% of their cost.  The new class would have a 5% annual depreciation rate, instead of the then-current 7% of 75% of eligible capital expenditures.  The existing CCA rules would generally apply, including rules relating to recapture, capital gains and depreciation (e.g., the "half-year rule").  These changes can be found in Annex 2 of the 2014 Budget, under Business Income Tax Measures.

Detailed legislative proposals are included in the Notice of Ways and Means Motion tabled March 22, 2016.

Revised: July 03, 2021

 

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