Business -> Eligible Capital Property
Eligible Capital Property (ECP), Eligible Capital Expenditures (ECE) and Cumulative Eligible Capital(CEC) Deduction
Income Tax Act s. 14(5), 20(1)(b), 54, 248(1)
The Federal 2016 Budget proposed to repeal the current tax treatment of eligible capital property (ECP), and replace it with a new capital cost allowance (CCA) class, available to businesses and provide 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 will be Class 14.1, and will have 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 deducted 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.
As per the 2016 budget, in order to reduce compliance burdens in respect of incorporation expenses, a separate business deduction will be provided (new s. 20(1)(b)) so that the first $3,000 of incorporation expenses will be 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 will apply as of January 1, 2017, to expenses incurred in 2017 and later years.
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.
Information on Canada Revenue Agency (CRA) website:
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 proposes to effect these changes beginning January 1, 2017. For more detail on the proposed changes, see Eligible Capital Property on the 2016 Budget website.
Under the 2014 Budget proposed changes, expenditures that are 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 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 proposed 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: January 27, 2018
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