The Federal government first announced these changes in the 2014 Federal Budget. The changes are now in draft legislation form. They generally take effect on January 1, 2017.
The main changes provide that eligible capital property of a business – which includes intangibles such as goodwill, unlimited licenses, and customer lists – will no longer be subject to the cumulative eligible capital (CEC) depreciation rules. Instead, the property will form a new class 14.1 of depreciable property, and will be subject to the regular capital cost allowance (CCA) rules that apply to other depreciable property.
Summary of current rules
Under current law, 3/4 of your expenditures on eligible capital property are added to the CEC pool. In computing your income from the business, you are allowed to deduct or depreciate the CEC pool on a declining balance basis at the annual rate of 7%.
When you sell a property, 3/4 of the proceeds of disposition reduce your CEC pool. If the CEC pool becomes negative, you must include “recapture” in your income. The “recapture” applies because you sold the property for more than the CEC balance, which is another way of saying you previously “over-depreciated” the property. However, if you sell the property for more than its original cost, only ½ of that excess is included in your income as business income (for certain farming or fishing businesses, the ½ excess can be eligible for the capital gains exemption).
Summary of new rules
Under the new rules beginning in 2017, the full cost of property that is currently eligible capital property is added to the Class 14.1 undepreciated capital cost (UCC) pool of depreciable property. The cost of the property may be depreciated at an annual rate of 5% under the capital cost allowance rules. The depreciation rate is therefore close to the rate under the old rules (which, as noted, allowed a deduction of 7% of ¾ of the original cost).
When you sell a property, the lesser of the proceeds and your original cost of the property reduces your UCC pool. If the UCC pool becomes negative, the negative amount results in recapture under the existing depreciable property rules. If you sell the property for more than its original cost, the excess is a capital gain, half of which is a taxable capital gain. So these rules on the sale of the property are similar to the old rules, except for the capital gains treatment.
Various transitional rules
There are many transitional rules, and they are far too lengthy and complex to review here in detail. But basically, the main transitional rule applies to eligible capital property acquired before 2017. In general terms, adjustments are made to convert your former CEC balance to a new Class 14.1 balance that will ensure tax results after 2016 similar to those under the old system.
For property acquired before 2017, the transitional rules allow a capital cost allowance deduction of 7% of the UCC of the property, for taxation years through 2026.