Eligible Capital Property Under Review

The 2014 Federal Budget has proposed to conduct a public consultation of the income tax rules with, in respect to eligible capital property, a view to “levelling the playing field” with other types of property. Among other changes, the proposed rules will impact taxpayers that sell the assets of their business when some of the sale proceeds are allocated to goodwill.

Eligible capital property is capital property with a definite life, other than tangible capital property or intangible capital property. Examples include incorporation costs, customer lists, and goodwill resulting from the purchase of another company’s assets.

Current Regime

For income tax purposes, eligible capital property is grouped into a single pool called cumulative eligible capital (CEC). When a taxpayer acquires a CEC property from an arm’s- length person, three-quarters of the purchase price is added to the CEC pool. When a taxpayer disposes of a CEC property, three-quarters of the proceeds of disposition is subtracted from the pool.

The depreciation or amortization of the CEC pool is called the cumulative eligible capital amount (CECA), and it is a maximum of seven per cent of the positive balance as at the year-end of the taxpayer (prorated for a short fiscal year). It should be noted that a taxpayer may choose to claim less than the seven per cent maximum in any year. The amount of CECA claimed is subtracted from the CEC pool balance at the end of the year.

To the extent the CEC pool has a negative balance at the year-end of the taxpayer, income tax consequences arise. The portion of the negative balance equal to the cumulative CECA claimed over the years will be reported as a recaptured amount and treated as active business income. Two-thirds of any excess negative value is brought into income as active business income.

For example, assume a corporation purchased a client list in June 2013 and sold it 18 months later in December 2014 for $200,000.

CEC Balance
Opening Balance 0
Year 1:
Purchase Price: $100,000 original cost Addition to CEC pool (3/4 x $100,000) + 75,000
CECA claim in first year 7% of 75,000 (3/4 x $100,000) – 5,250
= 69,750
Year 2:
Sale of client list: $200,000 proceeds Deduction from CEC pool (3/4 x $200,000) – 150,000
= (80,250)

RESULT — $80,250 negative balance in the CEC pool

Tax Consequence:

  • $5,250 amount of CECA previously claimed is re- captured and taxed as business income (leaving a $75,000 negative balance of CEC pool)
  • $50,000 taxed as business income (2/3 x 75,000 remaining negative balance in CEC pool)
  • $50,000 credit to capital dividend account (2/3 of 75,000)


The 2014 federal budget proposes to make the CEC system similar to that of the Capital Cost Allowance system. For example, the proposals provide that 100 per cent of expenditures would be added to the pool to be amortized, 100 per cent of the proceeds of disposition would be used in the calculation, and the gains on disposition would be an account of capital and not active business income. The most significant change would arise when a business sells its assets; the sale of goodwill would be taxed as a capital gain. This means the income reported will be passive or investment income and subject to the higher corporate taxes, a portion of which are refundable under provisions of the Income Tax Act.

For example, consider a business owner who has an offer to buy the assets of the company. As per the agreement, $10 million of the sale proceeds will be allocated to goodwill. Under the current regime this means the buyer can add three-quarters of the $10 million cost to its CEC pool, and the seller has to subtract three-quarters of the $10 million proceeds from its CEC pool. This example looks only at the goodwill portion of the agreement, and uses the 2014 federal tax rates combined with the provincial rates for PEI.

Current Rules Proposed Rules
Corporate Level
Business income (2/3 of negative CEC balance) $5,000,000
Taxable capital gain (2/3 of negative CEC balance) $5,000,000
Corporate taxes
(31.0%, 50.67%)
1,550,000 2,533,333
Refundable portion (26.67%) n/a 1,333,333
CDA credit (2/3 of negative CEC balance) 5,000,000 5,000,000
Cash position of company $8,450,000 $7,466,667
Shareholder Level
Capital dividend $5,000,000 $5,000,000
Taxable dividend 3,450,000 3,666,667
Personal taxes (28.71%, 38.74%) 990,495 1,420,467
Cash position of shareholder $7,459,505 $7,246,200


This example highlights two issues. First, under the proposed approach, the business owner’s cash position is about $213,000 worse than under the current regime. Second and more importantly, the business owner has lost almost $1,000,000 of tax deferral. In the above example the taxpayer could choose to leave the taxable dividend in the corporation, which would defer the tax on the taxable dividend.

Understanding the proposed changes will help business owners assess the potential impact on their wealth transfer plan.

E.O. & E.


This commentary is published by the Institute in consultation with an editorial board comprised of recognized authorities in the fields of law, life insurance and estate administration.

The Institute is the professional organization that administers and promotes the CLU and the CHS designations in Canada.

The articles and comments are not intended to provide legal, accounting or other device in individual circumstances. Seek professional assistance before acting upon information included in this publication.

Advocis*, the Institute for advanced financial education.

(The Institue”), CLU, CHS, FHF.C and APA are trademarks of the financial advisors Association of Canada (TFAAC).

The institute is a wholly-owned subsidiary of Advocis. Copywrite TFAAC. All rights reserved. Unauthorized reproduction of any images or content without permission is prohibited.

Copywrite  ISSN 0382-7038

Contributors to this edition:

James W. Kraft, cpa, ca, mtax, tep, cfp, clu, ch.f.c.
Deborah Kraft, mtax, tep, cfp, clu, ch.f.c.

About The Author

Mark Schneider
Mark Schneider is one of Canada's leading Chartered Financial Planners. For over 30 years he has helped hundreds of regular Canadian families grow small fortunes through consistent planning and wise advice. He holds the following designations: CFP, CLU, CHFC, CFSB

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