Amortization and sale of eligible capital property

Eligible capital property (ECP) includes such things as goodwill and other “nothings,” the cost of which neither qualifies for CCA (see topic 8) nor is deductible in the year of its acquisition as a current expense.

For example, if you purchase goodwill (the intangible value of a business, such as a recognized name and reputation), you’re permitted to amortize three-quarters of its cost on a declining-balance basis at the rate of 7%. When the goodwill is sold, three-quarters of the proceeds are credited to the unamortized pool at the time of sale and, if the balance of the pool becomes negative, an amount has to be reported as business income. This amount is split between the recapture of amounts previously claimed as amortization and, if the proceeds exceed the original cost, an amount that represents the equivalent of a capital gain.

When there’s only one asset in the cumulative eligible capital (CEC) pool, any gain on the disposition of ECP— after the recapture of amounts previously deducted—is taxed like a capital gain: The amount by which the proceeds exceed the original cost is taxed at 50% of the rate applicable to ordinary income. When there are other assets in the pool, the rules are more complicated. There are further adjustments when the taxpayer previously claimed the capital gains deduction with respect to the property disposed of (see topic 135).

If the disposition relates to the sale of qualified farm or fishing property, such as the sale of a quota, all or a portion of the negative balance may qualify for the capital gains deduction provided a special election is made (see topics 137 and 138).

The 2016 federal budget outlined proposals to change the income tax rules dealing with eligible capital expenditures and receipts. By replacing the existing ECP regime with a new capital cost allowance (CCA) class. As such, ECP will be subject to all of the rules that currently apply to depreciable capital property. Effective January 1, 2017, a taxpayer’s existing CEC pools will be transferred to new CCA class 14.1. Transitional rules provide that these pools will be depreciated at a 7% annual rate on a declining-balance basis for the first 10 years. Expenditures incurred after December 31, 2016 will be depreciated at a 5% annual rate on a declining-balance basis.2

The proposals also include special rules that will allow the first $3,000 of incorporation costs to be deducted by a business in the year as current expenses. Under the ECP regime, these costs are treated as eligible capital expenditures, 3/4 of which are added to the CEC pool.

The proposals include several other rules and some are quite complex. If your business has ECP,3 you should consult with your tax advisor to assess the impact that these rules will have on your business.

2 100% of eligible costs incurred after 2016 will be included in new Class 14.1, as opposed to three-quarters of eligible costs under the existing ECP regime.
3 The main ECP for many businesses will be internally generated goodwill.