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Eligible Capital Property Changes

From tax expert Gerry Vittoratos
July 26, 2017

Many changes have been brought to the treatment of Eligible Capital Properties (ECP) for tax years 2017 and afterwards. This instalment will explain these changes.

Eligible Capital Properties Become Depreciable Properties

As of January 1, 2017, all ECPs are now depreciable properties, with a new class number, class 14.1 [R1100(1)a)(xii.1)].  The depreciation rate (CCA rate) for additions after December 31, 2016, is 5% [R1100(1)a)(xii.1)]. The half-year rule applies for these new additions [R1100(2)].
For any property acquired before January 1, 2017, that is left over, the depreciation rate remains at 7% [R1100(1)c.1)]. This rate remains in effect until year 2027.  In order to accelerate the depreciation of these leftover assets, the Income Tax Act (ITA) allows taxpayers to increase the CCA claim to $500 even if the maximum amount for the class is less [R1100(1)c.1)].

A special rule has been added for the depreciation of incorporation expenses. For expenses below $3,000, the whole amount of incorporation expenses can be claimed as a current expense [ITA 20(1)b)]. For expenses above $3,000, $3,000 can be claimed as expense; the excess amount is added to class 14.1 [ITA 20(1)b)].
Disposition rules, subject to transitional rules (see below), are essentially the same as those for other depreciable properties. Gains from a sale of an ECP are now considered a capital gain and not business income. Recapture can apply if the original cost is higher than the UCC balance. Terminal losses work differently for class 14.1; they are allowed only if the business ceases its operations [ITA 20(16.1)c].

Transitional Rules - Dispositions for Properties Before January 1, 2017

As mentioned above, disposition rules are essentially the same as other depreciable properties. However, when disposing of ECPs with leftover balances from before January 1, 2017, transitional rules will apply in order to determine the original capital cost and deemed CCA taken for the purposes of recapture/terminal losses.
As a first step, we must determine the total capital cost of all property included in Class 14.1 [ITA 13(38)a)]


CECA Balance January 1, 2017 (Letter A)

xx

Plus: CECA deductions claimed in past years that were not recaptured (Letter B)

xx

Total capital cost for Class 14.1    [4/3 x (A+B)]     [ITA 13(38)a)]

xxx

 

Second step, determine the deemed CCA taken [ITA 13(38)c)]


Total capital cost determined under ITA 13(38)a) (see result in first step)

xx

Minus: CECA balance (Letter A above) 

(xx)

Deemed CCA claimed under ITA 20(1)a) before January 1, 2017   [ITA 13(38)c)]

xxx

After determining the original capital cost and deemed CCA, we can proceed with the disposition calculation under the transitional rules [ITA 13(39)]


UCC Balance for Class 14.1 (result in first step minus result in second step)

XX

Plus: Addition to capital cost [transitional rule ITA 13(39)] lesser of:

  • ¼ Capital Cost of the property [determined under ITA 13(38)b)]
  • ¼ Disposition amount

(XX)

Minus: Lesser of

  • Disposition amount
  • Capital Cost of the property

(XX)

Recapture (negative result)  [ITA 13(1)] – Terminal loss* (positive result) [ITA 20(16)]

XXX

*Terminal losses can only be claimed if the business ceases operations. [ITA 20(16.1)c)]

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