Proposed Amendments to The Taxation of Goodwill on The Sale of Eligible Capital Property

In the 2014 federal budget, the Federal government announced they would conduct consultations regarding “eligible capital property” (“ECP”). This is the category of business assets that includes goodwill and certain licences, franchises and quotas.

On the sale of a Canadian controlled private corporation under the current tax rules, eligible capital property assets are not treated as regular depreciable property. Instead, half of the value ascribed to goodwill and other eligible capital property is taxed at the active business-tax rate (currently 11% in Manitoba on the first $425,000 of annual profit). However, under the new proposals, the government may be planning on treating eligible capital property as regular depreciable property, and having its value taxed at the much higher investment tax rate on a sale. The result could be a significant tax increase, as typically the cost base on goodwill is near zero for tax purposes, resulting in a large gain on the sale.

In an effort to simplify the tax treatment of eligible capital property, the Federal government proposes to replace the existing eligible capital property rules with the introduction of a new Capital Cost Allowance (“CCA”) class available to businesses. Under the proposed regime, eligible capital expenditures and eligible capital receipts would result in an adjustment to the new CCA pool balance (with 100% of an eligible capital expenditure included in the new CCA class with a 5% depreciation rate). The existing CCA rules would generally apply to this new class, including rules relating to recapture, capital gains and depreciation. Additionally, special rules are proposed that will apply to goodwill and in respect of expenditures and receipts that do not relate to a specific property of the business and that would be eligible capital expenditures and eligible capital receipts under the current ECP rules. Under the special new CCA rules, such expenditures and receipts would be accounted for by adjusting the capital cost of the goodwill of the business and, consequently, the balance of the new CCA class. Every business would be considered to have goodwill associated with it even if there had not been an expenditure to acquire goodwill.

Prior to disposing of eligible capital property, make sure that you speak with your trained accounting and taxation professionals so that your businesses best interests are taken into account.