Capital assets provide an enduring benefit to your business over time. These assets cannot be expensed in full during the year of purchase but can be depreciated over time under the capital cost allowance (CCA) system. Intangible assets which meet the definition of eligible capital property may be eligible for CCA claims as well.
Eligible capital property is property that does not physically exist but provides a lasting benefit over time. This commonly includes assets such as goodwill, customer lists, trademarks, patents, franchise rights, and quotas. Certain expenses of incorporation, reorganization or amalgamation, such as legal and accounting fees, may be recognized as eligible capital property too. Incorporation expenses are deductible in the year incurred up to $3,000 and any amount in excess of $3,000 is recognized as eligible capital property.
Eligible capital property is capitalized to Class 14.1 and amortized at a rate of 5% per annum. As with many CCA classes, the half-year rule applies in the year of purchase. Patents, franchise rights, and other intangible assets that have a limited life are not included in this class. These assets are capitalized to class 14 and amortized on a straight-line basis over the useful life of the asset.
Class 14.1 came into effect on January 1, 2017. Prior to this time, eligible capital property was amortized under the rules of cumulative eligible capital (CEC). Various transitional rules were implemented to transfer any existing assets from the CEC pool to Class 14.1. One of these rules allowed companies to deduct small balances from the existing CEC pool. Until 2027, the annual deduction under Class 14.1 is calculated as the greater of the 5% per annum calculation, or $500.
One of the primary reasons for the changes implemented in 2017 was to change the taxation of eligible capital property at the time of sale, particularly for internally generated goodwill. All companies are assumed to have internally generated goodwill even if no costs have been incurred in respect of it. Proceeds from the sale of a business that are not directly attributable to specific assets are reflected as proceeds of sale of goodwill. Under the old regime, these proceeds were taxable as a capital gain on the income tax return. However, this capital gain was considered active business income and subject to tax at business income rates. Under the new Class 14.1 regime, the capital gain is taxable as investment income which is subject to the refundable taxes at the time of sale. Refundable taxes significantly increase the upfront tax cost of the sale. Therefore, the benefit of the tax deferral for corporations disposing of eligible capital property has been significantly restricted.
Intangible assets cannot be seen or touched but they are an important part to running a business. They are also a source of many complexities from a tax perspective.
For more information, please contact firstname.lastname@example.org or 1 844-GYTD-CPA