Most farm owners and small business owners have assets like goodwill tied up in their businesses. Some might also have licenses, customer lists, franchises, farm quotas or distribution rights.
On January 1, 2017, the federal government introduced draft legislation that will directly affect these assets, a new class of assets called the Class 14.1 pool.
With this new class 100% of expenditures on a license, incorporation costs, farm quota, or goodwill are added to this pool (previously only 75% was allowed). A depreciation rate of 5% will be permitted on a declining balance, commonly known as the Capital Cost Allowance (CCA).
The rules that currently 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 making the process much 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 externally purchased 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 goodwill of the business and, consequently, the balance of the Class 14.1 pool.
As with any depreciable property, any excess proceeds greater than the original cost of the intangible asset will be treated as a capital gain. Any previously deducted CCA will be recaptured to the extent that the receipt exceeds the balance in the Class 14.1 pool.
The existing intangible pool known as Cumulative Eligible Capital (CEC) balances will be transferred to the new Class 14.1 pool as of January 1, 2017, including those of taxpayers whose taxation year straddles January 1, 2017.
The opening balance of the Class 14.1 pool will be equal to the CEC balance as at December 31, 2016.
The CCA depreciation rate for property transferred to the Class 14.1 pool related to expenditures incurred before January 1, 2017, will be 7% until 2027. As mentioned above, the rate for expenditures made after January 1, 2017 falls to 5%.
Amounts received on the disposition of property after December 31, 2016, which relate to property acquired or expenditures made before January 1, 2017, will reduce the Class 14.1 pool at a 75% rate of the proceeds from the disposed property.
To simplify the transition, there are special rules for small businesses that allow a deduction:
- For expenditures incurred before 2017, equal to the greater of $500 and or the amount otherwise deductible for the year, for years that end prior to 2027
- In computing income, for the first $3,000 of incorporation expenses
These new rules are meant to simplify the existing eligible capital property (ECP) rules. However, it can still be confusing.
Be sure that you and/or your tax specialist are clear on these new rules and implement them correctly should they be passed into law.
Meet with a tax consultant in your area for a free consultation to better understand how these rules could affect your farm or small business. We have FBC representatives across Canada who can meet with you at your home or business.