Ottawa changing tax rules for intangible property

A farm has many assets. Some are tangible, such as buildings and equipment, while others are intangible, such as milk quota and goodwill.

For a long time, it was thought that the tax rules relating to intangible property, also known as Eligible Capital Property, were too complicated.

The most recent budget finally addressed the matter.

The new rules will affect intangible assets such as goodwill, licences, customer lists, incorporation costs, franchises and distribution rights. They will also directly affect quotas.

Intangibles that are now considered Eligible Capital Property have 75 percent of their value put into a pool that amortizes at seven percent a year.

However, the federal government will introduce a new class of assets Jan. 1 called the Class 14.1 pool.

With this new class, 100 percent of expenditures will be added to the pool.

For Eligible Capital Property acquired after Jan. 1, a new depreciation rate of five percent will be permitted on a declining balance, commonly known as the Capital Cost Allowance.

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The rules that now apply to depreciable property, such as the “half-year rule,” recapture and capital gains, will also apply to the properties included in this new class, which makes the process more consistent across both classes.

Special rules will apply to expenditures that do not relate to a specific property of a business, such as those that were not acquired through purchase but grown inside the company.

Every business will be considered to have goodwill associated to it, even if no expenditures on goodwill have been made.

Expenditures that do not relate to a particular property will increase the capital cost of the business’s goodwill and, consequently, the balance of the Class 14.1 pool.

As with any depreciable property, if the intangible asset is sold, any proceeds greater than the original cost will be treated as a capital gain.

Any previously deducted Capital Cost Allowance will be recaptured to the extent that the receipt exceeds the balance in the Class 14.1 pool.

The existing intangible Cumulative Eligible Capital pool balances will be transferred to the new Class 14.1 pool as of Jan. 1, including those of taxpayers whose taxation year straddles that date.

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The opening balance of the Class 14.1 pool will be equal to the CEC balance as at Dec. 31.

The Capital Cost Allowance depreciation rate for property transferred to the Class 14.1 pool related to expenditures made before Jan. 1, will be seven percent until 2027.

The rate for expenditures made after Jan. 1 falls to five percent.

Amounts received on the disposition of property after Dec. 31, which relate to property acquired or expenditures made before Jan. 1, will reduce the Class 14.1 pool at a 75 percent rate of the proceeds from the disposed property.

Special rules for small businesses that allow a deduction will simplify the transition:

  • for expenditures incurred before 2017, equal to the greater of $500 or the amount otherwise deductible for the year, for years that end before 2027.
  • in computing income, for the first $3,000 of incorporation expenses

I suggest you seek the assistance of your accounting or tax specialist if these “simplified” new rules apply to you and they don’t seem all that simple.

Grant Diamond is a tax analyst in Saskatoon, SK., with FBC, a company that specializes in farm tax. Contact: fbc@fbc.ca or 800-265-1002.

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