Explanatory Notes - Eligible Capital Property

These explanatory notes describe proposed amendments to the Income Tax Act, the Excise Tax Act and related legislation. These explanatory notes describe these proposed amendments, clause by clause, for the Notice of Ways and Means Motions, for the assistance of Members of Parliament, taxpayers and their professional advisors. In these explanatory notes, references to clause numbers are to the respective clause numbers in the Notice of Ways and Means Motion to Amend the Income Tax Act and Other Tax Legislation, in the Notice of Ways and Means Motion to Amend the Excise Tax Act and in the Draft Amendments to Various GST/HST Regulations.

These notes are intended for information purposes only and should not be construed as an official interpretation of the provisions they describe.

Amendments to the Income Tax Act and Related Legislation

Overview

The eligible capital property (ECP) rules in section 14 of the Income Tax Act (the Act) govern the tax treatment of certain expenditures (outlays and expenses described in the definition “eligible capital expenditure” in subsection 14(5)) and receipts (amounts described by E in the definition “cumulative eligible capital” in subsection 14(5)) that are not otherwise accounted for as business revenues or expenses, or under the rules relating to capital property.

The ECP rules are repealed and replaced by new Class 14.1 of Schedule II to the Income Tax Regulations (the Regulations), effective on January 1, 2017. Property that was ECP will be depreciable property and expenditures and receipts that were accounted for under the ECP rules will be accounted for under the rules for depreciable property and capital property. These changes are discussed below as if the changes have come into effect.

Depreciation

New Class 14.1 generally includes goodwill, property that was ECP before January 1, 2017 and property acquired on or after January 1, 2017, the cost of which would be treated as an eligible capital expenditure under the ECP rules. The full cost of property of the new class acquired after January 1, 2017 is added to the undepreciated capital cost (UCC) of the class, instead of only 75% of the cost being added to cumulative eligible capital (CEC) under the ECP rules.

To account for the increase in the portion of the cost of property that is allowed to be depreciated from 75% to 100%, new subparagraph 1100(1)(a)(xii.1) of the Regulations provides that capital cost allowance in respect of the new class may be taken at 5% on a declining balance basis under paragraph 20(1)(a) of the Act, instead of 7% on a declining balance basis under former paragraph 20(1)(b).

Subsection 1101(1) of the Regulations provides for a separate class in respect of each business of a taxpayer. This is consistent with the ECP rules, which provided for a separate CEC pool in respect of each business of a taxpayer. As a result, there is a separate new Class 14.1 in respect of each CEC pool of a taxpayer.

Recapture

Amounts deducted in respect of property of the new class under paragraph 20(1)(a) are subject to recapture under subsection 13(1) of the Act. The reduction in the UCC of the class from the disposition of property is generally equal to the lesser of the proceeds of disposition of the property and the capital cost of the property. The amount of any negative UCC balance is included in income under subsection 13(1) as recapture.

Taxation of gains

Gains from the disposition of property of the new class are taxable under subdivision c of Division B of Part I of the Act. When a capital property is disposed of, the amount by which the proceeds of disposition exceed the cost of the property generally results in a capital gain, 50% of which is included in income as a taxable capital gain.

Expenditures and receipts not related to property

The definition “property” in subsection 248(1) of the Act is broad and includes, for example, a right of any kind whatever. As a result, most, but not all, expenditures and receipts that would be eligible capital expenditures or eligible capital receipts under the ECP rules relate to the acquisition or disposition of a property and, consequently, such amounts result in an adjustment to the UCC of the new CCA class when the property is acquired or disposed of.

New subsections 13(34) to (36) of the Act provide special rules for expenditures and receipts of a business that do not relate to property and that would adjust the CEC of the business under the ECP rules. Such an expenditure or receipt is accounted for by adjusting the capital cost of the goodwill of the business. Subsection 13(34) provides that every business is considered to have goodwill property associated with it, even if there has not been an expenditure to acquire goodwill. Subsections 13(34) and (35) provide that an expenditure that does not relate to property increases the capital cost of the goodwill of a business and, consequently, the UCC of the new CCA class.

Subsections 13(34) and (36) provide that a receipt that does not relate to property reduces the capital cost of the goodwill of a business and, consequently, the UCC of the new CCA class, by the lesser of the capital cost of the goodwill (which could be nil) and the amount of the receipt. If the amount of the receipt exceeds the capital cost of the goodwill, the excess results in a capital gain. Previously deducted depreciation is recaptured to the extent that the reduction to the capital cost of goodwill results in a negative UCC balance.

Transitional rules – additional depreciation

New subparagraph 1100(1)(c.1)(i) of the Regulations provides that, for taxation years that end before 2027, the depreciation rate for the new CCA class is 7 per cent in respect of expenditures incurred before January 1, 2017 instead of the 5 per cent provided by new subparagraph 1100(1)(a)(xii.1).

Transitional rules – undepreciated capital cost balance

New paragraphs 13(37)(a) to (d) generally provide that the UCC of the new class in respect of a business at the beginning of January 1, 2017 is equal to the amount that would have been the CEC balance in respect of the business at the beginning of January 1, 2017.

• First, paragraph 13(37)(a) deems the total capital cost of all property in Class 14.1 at the beginning of that day to be, generally, 4/3 of the total of the amount that would have been the CEC balance at the beginning of that day and past depreciation claimed under paragraph 20(1)(b) that has not been recaptured before that day.
• Second, paragraph 13(37)(b) provides rules for allocating that total capital cost as between goodwill property and each identifiable property in the new class that was an eligible capital property.
• Third, paragraph 13(37)(c) deems an amount to have been allowed as capital cost allowance under paragraph 20(1)(a) before January 1, 2017, such that the UCC balance at the beginning of January 1, 2017 is equal to the amount that would have been the CEC balance at the beginning of January 1, 2017.

The determination of the total capital cost and the allocation of the capital cost of each property that was an eligible capital property before January 1, 2017 is relevant to the calculation of recaptured capital cost allowance and capital gain in respect of the disposition of such a property on or after January 1, 2017. It is not necessary to determine the total capital cost, or to allocate a capital cost to each property, to determine the amount that may be deducted under 20(1)(a) in respect of the new class.

Transitional rules – deemed gain immediately before January 1, 2017

Paragraph 13(37)(d) provides rules for including an amount in a taxpayer’s income in a taxation year that straddles January 1, 2017. The amount of the income inclusion, if any, is relevant to the calculation of the final CEC balance for the purpose of determining the total capital cost of the class under paragraph 13(37)(a). An income inclusion may be required, for instance, if a taxpayer receives proceeds in that taxation year and prior to January 1, 2017, such that there would have been an income inclusion under paragraph 14(1)(b) if the taxation year had instead ended immediately before January 1, 2017. A taxpayer may choose to have the income inclusion reported as business income or as a taxable capital gain.

An election to defer this income inclusion is available in a manner that is conceptually similar to the manner in which income inclusions could be deferred under the ECP rules. Where, on or after January 1, 2017 and in that taxation year the taxpayer acquires a property of the new class or is deemed by subsection 13(35) to have acquired goodwill, the taxpayer may elect to reduce the income inclusion under paragraph 13(37)(d), by up to half of the capital cost of the new property. In this case, the capital cost of the new property is then reduced by twice the amount by which the income inclusion is reduced.

Transitional rules – Dispositions of former ECP

New subsection 13(38) is intended to ensure that receipts related to expenditures incurred before January 1, 2017 do not result in excess recapture when applied to reduce the balance of the new CCA class. Subsection 13(38) provides, in effect, that certain qualifying receipts reduce the UCC of the new CCA class at a 75% rate (the rate at which eligible capital expenditures were added to CEC). Receipts that qualify for the 75% rate are generally receipts from the disposition of a property that was an ECP and receipts that do not represent the proceeds of disposition of property.  This is achieved by increasing the UCC of the new class by, generally, 25% of the lesser of the proceeds of disposition and the cost of the property disposed of.

Transitional rules – Non-arm’s length dispositions of former ECP

Although subsection 13(38) increases the UCC balance of the new class for, generally, 25% of the proceeds of disposition of property that was ECP before January 1, 2017, new subsection 13(39) is intended to prevent the use of non-arm’s length transfers to increase the amount that can be depreciated in respect of the new class. Subsection 13(39) generally provides that where a taxpayer acquires a property of the new class, in effect only 3/4 of the capital cost of the property is included in the UCC in respect of the class if

• the property or a similar property was previously an eligible capital property of the taxpayer or a person or partnership not dealing at arm’s length with the taxpayer; and
• subsection 13(38) applied to increase the UCC in respect of an earlier disposition of the property or similar property by the taxpayer or the non-arm’s length person or partnership.

This effect is achieved by deeming the taxpayer to have claimed CCA in respect of the new class equal to the lesser of 1/4 of the cost of the property acquired and the amount that was deemed by subsection 13(38) to have been added to the UCC of the new class of the taxpayer or another person or partnership.

Consequential Amendments

The provisions relating to ECP are specifically referenced in various income tax rules. A number of amendments to various Income Tax Act provisions will be required consequential to the repeal of the ECP rules and the creation of new Class 14.1 of depreciable property. The Notice of Ways and Means Motion  contains provisions relating to the main substantive proposals for the transition from the ECP regime to the CCA regime, and does not include proposals in respect of less substantive consequential amendments. These notes list the anticipated consequential amendment proposals below. Explanatory notes are provided below in respect of consequential amendments related to the Goods and Services Tax/Harmonized Sales Tax, which are intended to provide that the application of the Goods and Services Tax/Harmonized Sales Tax in this area is not affected.

Income Tax Act

Clause 63

Depreciable property

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13

Section 13 of the Act provides rules relating to depreciable property. As a result of the repeal of the eligible capital property rules in section 14 of the Act and the creation of new Class 14.1 of depreciable property under section 1100 of the Income Tax Regulations, property that was previously eligible capital property is depreciable property in new Class 14.1 and the rules in section 13 apply to this property on and after January 1, 2017. As with the eligible capital property rules, there is a separate expenditure pool in respect of each business of a taxpayer. Each cumulative eligible capital pool of a taxpayer will be replaced by a new undepreciated capital cost pool.

New subsections 13(34) to (36) provide rules relating to goodwill and expenditure and receipts that do not relate to property. New subsections 13(37) to (40) provide transitional rules.

Goodwill

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13(34)

Subsection 13(34) of the Act ensures that the determination of whether a property is depreciable property is made before determining whether the cost of the property is eligible for deduction under sections 66 to 66.4, applicable to taxation years that end after 1987 and before December 6, 1996. Paragraph 1102(1)(a) of the Income Tax Regulations provides the same result for taxation years that end after December 5, 1996.

Subsection 13(34) is replaced as of January 1, 2017.

Consequential on the repeal of the ECP rules and the creation of new Class 14.1 of depreciable property, new subsection 13(34) provides rules for determining the cost of goodwill acquired and disposed of.  It is necessary to determine the cost of the goodwill of a business in order to calculate capital gains, the undepreciated capital cost balance of the new class, and the recapture of depreciation previously claimed.

Subsection 13(34) is intended to recognize that goodwill is not a separately identifiable property and can only be disposed of as part of the sale of a business as a going concern. The definition “property” in subsection 248(1) is concurrently amended to provide that the goodwill of a business is property for the purposes of the Act. Goodwill is also included in new Class 14.1 of Schedule II to the Income Tax Regulations.

The combined effect of subsections 13(34) to (36) and the existing rules relating to depreciable property includes the following:

• Each identifiable property included in the new class has the cost that is identifiable (as applies to other depreciable property).
• Capital expenditures that do not relate to an identifiable property (or that are to acquire goodwill) are pooled into the cost of a single goodwill property of the business.
• If a taxpayer receives a capital receipt that does not relate to an identifiable property:
• the receipt is deemed to be the proceeds of disposition of a portion of the goodwill property of the business;
• the cost of the property disposed of is the cost in the pool (not exceeding the amount of the proceeds); and
• where the taxpayer continues to carry on the remaining business, the taxpayer is deemed to still have a goodwill property in respect of the business, but the new cost of that property (if any) is the old cost less the proceeds just received.

In particular, paragraph 13(34)(a) deems there to be a single goodwill property in respect of a particular business.

Paragraph 13(34)(b) provides that if a taxpayer who carries on a particular business acquires goodwill as part of the acquisition of another business that is carried on, after the acquisition, as part of the particular business (or if the taxpayer is deemed by new subsection 13(35) to acquire goodwill in respect of the particular business), the cost of the goodwill acquired is added to the cost of the goodwill in respect of the particular business. That is, a taxpayer is considered to own a single goodwill property in respect of a business, and if goodwill is acquired as a result of a business acquisition (such that the second business becomes part of the first), the taxpayer still has only one goodwill property in respect of the continuing business.

Paragraph 13(34)(c) provides that if a taxpayer who carries on a particular business

• is deemed by subsection 13(36) to dispose of goodwill in respect of the particular business, or
• disposes of goodwill as part of the sale of a portion of the particular business, receives proceeds of disposition a portion of which is attributable to goodwill, and continues to carry on the remaining business,

then:

1. the taxpayer is deemed to have disposed of a portion of the goodwill in respect of the particular business having a cost equal to the lesser of the cost of the single goodwill property in respect of the particular business and the proceeds attributable to goodwill, and
2. the cost of the goodwill property in respect of the particular business is reduced by the amount determined to be the cost of the portion of the goodwill disposed of.

This recognizes that a taxpayer may sell a portion of a business and receive proceeds in respect of goodwill. However, if the remaining business continues the taxpayer still has a goodwill property in respect of that business.

If a taxpayer makes more than one disposition of goodwill at the same time, paragraph 13(34)(d) provides that paragraph 13(34)(c) and subsection 13(38) apply as if each disposition had occurred separately. Subsection 13(38) provides a transitional rule that may apply to increase a taxpayer’s undepreciated capital cost when the taxpayer disposes of certain property included in new Class 14.1.

Outlays not relating to property

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13(35)

New subsection 13(35) of the Act deems a taxpayer to have acquired goodwill in respect of a business with a cost equal to the amount of certain capital expenditures incurred in respect of the business. The language in subsection 13(35) is based in principle on the definition “eligible capital expenditure” in former subsection 14(5). A main difference is that subsection 13(35) does not apply to expenditures to acquire property.

Property (for example, customer lists and licences, franchise rights and farm quotas of indefinite duration), the cost of which would previously have been treated as an eligible capital expenditure, is generally included in new Class 14.1 of Schedule II to the Income Tax Regulations. Goodwill that is acquired, i.e. when a business is acquired, is a property that is included in new Class 14.1 of Schedule II to the Income Tax Regulations.  This is distinguishable from the deemed acquisition of goodwill under subsection 13(35), which relates to capital expenditures that are not incurred to acquire an identifiable property. However, the cost of goodwill deemed acquired under subsection 13(35) is added to the cost of the single goodwill property of the business as a result of new subsection 13(34), and to the undepreciated capital cost of the class in respect of the business as a result of variable A of the definition “undepreciated capital cost” in subsection 13(21).

Subject to paragraphs 13(35)(a) to (e), subsection 13(35) provides that if a taxpayer makes or incurs an outlay or expense, at any time on or after January 1, 2017, on account of capital for the purpose of gaining or producing income from a business carried on by the taxpayer, the taxpayer is deemed to acquire property at that time that is goodwill in respect of the business with a cost equal to the amount of the outlay or expense. (As with eligible capital expenditures, subsection 13(35) does not apply to an outlay or expense that is made for the purpose of gaining or producing income from property.)

Paragraphs 13(35)(a) to (e) provide conditions that must be met in order for subsection 13(35) to apply to an outlay or expense.

Paragraph 13(35)(a) provides that subsection 13(35) does not apply to an outlay or expense if any portion of the amount is the cost, or any part of the cost of property. In order for the cost of property to be added to the undepreciated capital cost of the new class, the property must be prescribed in Class 14.1 of Schedule II to the Income Tax Regulations.

Paragraph 13(35)(b) provides that subsection 13(35) does not apply to an outlay or expense if any portion of the amount would be deductible in computing the taxpayer’s income from the business if subsection 13(35) did not apply.

Paragraph 13(35)(c) provides that subsection 13(35) does not apply to an outlay or expense if any portion of the amount is not deductible in computing the taxpayer’s income from the business because of any provision of the Act (other than paragraph 18(1)(b)) or the Income Tax Regulations. An outlay or expense that is made or incurred for the purpose of gaining or producing exempt income, for example, does not meet the condition in paragraph 13(35)(b) since the deduction of such an outlay or expense is specifically not deductible because of paragraph 18(1)(c).

Paragraph 13(35)(d) provides that subsection 13(35) does not apply to an outlay or expense if any portion of the amount is paid or payable to a creditor of the taxpayer as, on account of or in lieu of payment of, any debt, or on account of the redemption, cancellation or purchase of any bond or debenture.

Paragraph 13(35)(e) provides that subsection 13(35) does not apply to an outlay or expense if any portion of the amount is, where the taxpayer is a corporation, partnership or trust, paid or payable to a person as a shareholder, partner or beneficiary, as the case may be, of the taxpayer.

Subsection 13(35) comes into force on January 1, 2017.

Receipts not relating to property

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13(36)

Subsection 13(36) deems a taxpayer to dispose of goodwill for proceeds equal to the amount of certain capital amounts received in respect of a business. The language in subsection 13(36) is based in principle on variable E of the definition “cumulative eligible capital” in former subsection 14(5). A main difference is that subsection 13(36) does not generally apply to proceeds from the disposition of property.

Subsection 13(36) does not apply to proceeds of disposition of property that is goodwill from the sale of a business as a going concern. Goodwill is deemed to be property under amended subsection 248(1).  Proceeds from goodwill are subject to rules that apply generally to the disposition of depreciable property. 

Goodwill is included in new Class 14.1 of Schedule II to the Income Tax Regulations. The deemed disposition of goodwill under subsection 13(36) can result in a decrease in the undepreciated capital cost of the class in respect of the business as a result of new subsection 13(34) and variable F of the definition “undepreciated capital cost” in subsection 13(21).

Subject to paragraphs 13(36)(a) to (c), subsection 13(36) provides that if a taxpayer has or may become entitled to receive an amount on account of capital in respect of a business carried on or formerly carried on by the taxpayer, the taxpayer is deemed to dispose of goodwill of the business for proceeds of disposition equal to the amount by which the amount the taxpayer has or may become entitled to receive exceeds all outlays or expenses that were not otherwise deductible in computing the taxpayer’s income and were made or incurred by the taxpayer for the purpose of obtaining the amount.

Paragraphs 13(36)(a) to (c) provide conditions that must be met in order for subsection 13(36) to apply to a receipt.

Paragraph 13(36)(a) provides that subsection 13(36) does not apply to an amount that is included in computing the taxpayer’s income, or deducted in computing any balance of undeducted outlays, expenses or other amounts for the year or a preceding taxation year.

Paragraph 13(36)(b) provides that subsection 13(36) does not apply to an amount that reduces the cost or capital cost of a property or the amount of an outlay or expense.

Paragraph 13(36)(c) provides that subsection 13(36) does not apply to an amount that is included in computing any gain or loss of the taxpayer from a disposition of a capital property.

Subsection 13(36) comes into force on January 1, 2017.

Class 14.1 – transitional rules

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13(37) to (40)

Overview

Subsection 13(37) to (40) provide transitional rules that apply consequential on the repeal of the ECP rules and the creation of new Class 14.1 of depreciable property.

Subsection 13(37) provides rules where a taxpayer incurs an eligible capital expenditure in respect of a business before January 1, 2017. Subsection 13(37) effectively transfers a taxpayer’s existing cumulative eligible capital balance in respect of a business to the undepreciated capital cost balance of the new class in respect of the business.

Paragraphs 13(37)(a) to (c) generally provide that the undepreciated capital cost of the new class in respect of a business at the beginning of January 1, 2017 is equal to the amount that would have been the cumulative eligible capital (CEC) balance in respect of the business at the beginning of January 1, 2017.

• First, paragraph 13(37)(a) deems the total capital cost of all property in Class 14.1 at the beginning of that day to be, generally, the total of 4/3 of the amount that would have been the CEC balance at the beginning of that day and 4/3 of the amount of past depreciation claimed under paragraph 20(1)(b) that has not been recaptured before that day.
• Second, paragraph 13(37)(b) provides rules for allocating that total capital cost as between goodwill property and each identifiable property in the new class that was an eligible capital property.
• Third, paragraph 13(37)(c) deems an amount to have been allowed as capital cost allowance under paragraph 20(1)(a) before January 1, 2017, such that the UCC balance at the beginning of January 1, 2017 is equal to the amount that would have been the CEC balance at the beginning of January 1, 2017.

For taxpayers with a taxation year that straddles January 1, 2017 (i.e., no taxation year ends immediately before January 1, 2017), paragraph 13(37)(d) also provides for an income inclusion where there would be an income inclusion under 14(1)(b) if the taxation year had ended immediately before January 1, 2017. This income inclusion can be deferred or offset in certain circumstances.

Subsection 13(38) provides that, where certain property that was eligible capital property before January 1, 2017 is disposed of on or after January 1, 2017, the undepreciated capital cost of the new class is increased to prevent excess recapture as a result of the effective transfer of the CEC pools under subsection 13(37).

Subsection 13(39) prevents the use of subsection 13(38) to “step-up” the undepreciated capital cost of the new class by means of a non-arm’s length transfer of property that was eligible capital property before January 1, 2017. Subsection 13(39) provides that where such a property is acquired by a taxpayer from a person that does not deal at arm’s length with the taxpayer, the undepreciated capital cost of the new class is decreased. Generally, subsection 13(39) applies to acquisitions of property, the cost of which is attributable to an amount in respect of which subsection 13(38) applied.

Subsection 13(40) provides that, for the purposes of subsections 13(37) to (39) and 40(13) to (16), the definitions “cumulative eligible capital”, “eligible capital expenditure”, “eligible capital property” and “exempt gains balance” have the same meanings that would be assigned to those expressions if the Act read as it did immediately before January 1, 2017.

Deemed total capital cost

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13(37)(a)

Paragraph 13(37)(a) provides the total capital cost (at the beginning of January 1, 2017) of all property of a taxpayer included in Class 14.1 of Schedule II to the Income Tax Regulations in respect of the business, each of which was an eligible capital property of the taxpayer immediately before January 1, 2017 or is the goodwill property in respect of the business.

The total capital cost is important for determining the amount of gains or recapture but is not required to be calculated in order to determine the amount that may be deducted under 20(1)(a) since the undepreciated capital cost on January 1, 2017 will equal the amount that would be the cumulative eligible capital on January 1, 2017.

At the beginning of January 1, 2017, the total capital cost is deemed to be equal to the formula 4/3(A + B – C). The formula is generally equal to the amount of receipts a taxpayer could have received under the ECP rules without resulting in an income inclusion under paragraph 14(1)(b).

Variable A is equal to the positive balance, if any, of the taxpayer’s cumulative eligible capital in respect of the business at the beginning of January 1, 2017. The positive balance of a taxpayer’s undepreciated capital cost on January 1, 2017 is equal to the positive balance of the taxpayer’s cumulative eligible capital on January 1, 2017.

Variable B is equal to the amount determined for F in the definition “cumulative eligible capital” in former subsection 14(5) at the beginning of January 1, 2017. This amount is generally equal to the amount of deductions taken from the cumulative eligible capital pool that have not been recaptured.

Variable C is equal to the negative balance, if any, of the taxpayer’s cumulative eligible capital in respect of the business at the beginning of January 1, 2017. The negative balance of a taxpayer’s cumulative eligible capital is equal to the amount by which the total of all amounts determined, in respect of the business, for E or F in the definition “cumulative eligible capital” in former subsection 14(5), exceeds the total of all amounts determined for A to D.1 in that definition in respect of the business at the beginning of January 1, 2017. This amount includes any adjustment required by subparagraph 13(37)(d)(i) as a result of a deemed gain or income inclusion under paragraph 13(37)(d). Variable C will generally only be positive if a taxation year of the taxpayer straddles January 1, 2017 (i.e., no taxation year ends immediately before January 1, 2017) and the taxpayer receives an eligible capital amount in the taxation year and before January 1, 2017. A negative cumulative eligible capital balance will become the negative undepreciated capital cost balance on January 1, 2017, the amount of which generally result in recapture under subsection 13(1) at the end of the taxation year unless amounts are added to the undepreciated capital cost of the class before the end of the year (e.g., the taxpayer acquires a property of the new class).

Deemed capital cost of a property

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13(37)(b)

Paragraph 13(37)(b) deems the capital cost of each property of the taxpayer that is included in the new class and that is goodwill in respect of the business or was an eligible capital property of the taxpayer immediately before January 1, 2017. The capital cost of these properties is relevant to the calculation of the recapture of depreciation and capital gain upon the disposition of property of the new class but is not required to be determined in order to calculate the amount that can be deducted under paragraph 20(1)(a) in respect of the class.

Subparagraph 13(37)(b)(i) provides that the taxpayer must designate the order in which the capital cost of each property that is not the goodwill property is determined, and that if the taxpayer does not designate an order, the Minister may designate the order.

Subparagraph 13(37)(b)(ii) provides that the capital cost of a particular property in respect of a business (other than goodwill) is deemed to be the lesser of the eligible capital expenditure of the taxpayer in respect of the particular property and the amount by which the total capital cost of the class, as determined by paragraph 13(37)(a), exceeds the total of all amounts each of which is an amount deemed by subparagraph 13(37)(b)(ii) to be the capital cost of a property that is determined in advance of the determination of the capital cost of the particular property. This allows taxpayers to assign available capital cost to each property in the order designated under subparagraph 13(37)(b)(i).

Subparagraph 13(37)(b)(iii) deems the capital cost of the goodwill property in respect of the business to be the amount by which the total capital cost of the class exceeds the total of all amounts each of which is an amount deemed by subparagraph 13(37)(b)(ii) to be the capital cost of a property.  The capital cost of each property of the class (other than goodwill) in respect of the business must be determined under 13(37)(b)(ii) before the capital cost of the goodwill property can be determined.

Although the determination of the total capital cost of the class under paragraph 13(37)(a) and the capital cost of a particular property under paragraph 13(37)(b) applies as of January 1, 2017, these determinations are generally not required to be calculated until property of the class is disposed of, because the total capital cost and individual capital costs are not required to be known in order to calculate the undepreciated capital cost of the new class (and likewise the amount that is allowed to be deducted under paragraph 20(1)(a)). This is because paragraph 13(37)(c) ensures that the undepreciated capital cost of the new class at the beginning of January 1, 2017 is equal to the amount that would be the cumulative eligible capital balance in respect of the business at the beginning of January 1, 2017.

Undepreciated capital cost balance

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13(37)(c)

Paragraph 13(37)(c) ensures that the undepreciated capital cost of the new class in respect of a business at the beginning of January 1, 2017 is equal to the amount that would otherwise be the cumulative eligible capital in respect of the business at the beginning of January 1, 2017.  Paragraph 13(37)(c) also ensures that any negative cumulative eligible capital balance is reflected in the calculation of the undepreciated capital cost of the new class.

Paragraph 13(37)(c) deems an amount to have been allowed to the taxpayer in respect of the class under regulations made under paragraph 20(1)(a) in computing the taxpayer’s income for taxation years ending before January 1, 2017, equal to the amount by which the total capital cost of the class (determined by the formula in paragraph 13(37)(a)) and the amount of any negative cumulative eligible capital balance (determined by variable C of the formula in paragraph 13(37)(a)) exceeds the positive cumulative eligible capital balance (determined by variable A of the formula in paragraph 13(37)(a)).

Accrued gains from eligible capital property

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13(37)(d)

If a taxation year of a taxpayer straddles January 1, 2017 (i.e., it does not end at the end of 2016), paragraph 13(37)(d) deems the taxpayer to have for that year a capital gain (or where a taxpayer elects under subparagraph 13(37)(d)(iii), an income inclusion in respect of a business) if the taxpayer would have had an income inclusion under paragraph 14(1)(b) if the taxpayer’s taxation year had ended immediately before January 1, 2017. This paragraph is intended to ensure that the rules applying to eligible capital property apply to dispositions before January 1, 2017.

Subparagraph 13(37)(d)(i) provides that, for the purposes of the formula in paragraph 13(37)(a), the cumulative eligible capital in respect of a business is increased by 3/2 of the amount that would be included in income under 14(1)(b). This subparagraph effectively reduces the negative cumulative eligible capital balance to account for any taxable capital gain or income inclusion under subparagraphs 13(37)(d)(ii) or (iii).

Subparagraph 13(37)(d)(ii) provides that the taxpayer is deemed to dispose of a capital property in respect of the business immediately before January 1, 2017 for proceeds of disposition equal to twice the amount that would be the income inclusion under 14(1)(b) resulting in a taxable capital gain equal to the amount that would be the income inclusion under 14(1)(b).

Subparagraph 13(37)(d)(iii) allows a taxpayer to elect that subparagraph (ii) does not apply, and instead an amount is to be included in computing the taxpayer’s income from the business for the particular year equal to the amount that would be the income inclusion under paragraph 14(1)(b).

Subparagraph 13(37)(d)(iv) allows a taxpayer to elect to defer the taxable capital gain or income inclusion under subparagraph 13(37)(d)(ii) or (iii) if, on or after January 1, 2017 and in the taxation year that includes January 1, 2017, the taxpayer acquires a property included in the class in respect of the business or is deemed by subsection 13(35) to acquire goodwill in respect of the business. Where a taxpayer makes this election, the taxable capital gain (or income inclusion) is reduced by the lesser of the amount of the taxable capital gain (or the income inclusion) and 1/2 of the capital cost of the property or goodwill acquired. To account for the reduction in the taxable capital gain or income inclusion, the capital cost of the property or goodwill acquired is decreased by twice the amount of the reduction. 

Subparagraph 13(37)(d)(v) deems the capital gain under subparagraph 13(37)(d)(ii) to be attributable to the disposition of a qualified farm or fishing property to the extent that the income inclusion that would have occurred under paragraph 14(1)(b) is attributable to the disposition of a qualified farm or fishing property.

Reduced recapture

ITA
13(38)

Consequential on the repeal of the ECP rules and the creation of new Class 14.1 of depreciable property, expenditures that would previously increase the cumulative eligible capital of a taxpayer in respect of a business at a 75% rate will, subject to subsection 13(39), now increase the undepreciated capital cost of the new class at a 100% rate.  Receipts that would previously reduce the cumulative eligible capital of a taxpayer in respect of a business at a 75% rate will, subject to subsection 13(38), now reduce the undepreciated capital cost fully included in income.

Subsection 13(38) increases the undepreciated capital cost of new Class 14.1 to the extent necessary to prevent excess recapture when a taxpayer disposes of certain property included in the class. Subsection 13(38) is intended to ensure that a receipt from the disposition of property the cost of which was included in cumulative eligible capital or undepreciated capital cost at a 75% rate does not reduce the undepreciated capital cost at a 100% rate.

To increase the undepreciated capital cost of the class, subsection 13(38) deems a taxpayer to have acquired a depreciable property of the class with a capital cost equal to the least of three amounts: the first two of these are 1/4 of the proceeds of disposition of the property that is disposed of and 1/4 of the capital cost of that property. The third amount is determined under paragraphs 13(38)(a) to (e).

Paragraphs 13(38)(a) to (d) describe four types of property. Paragraph 13(38)(e) is “nil”, and applies if the property disposed of is not described in any of paragraphs 13(38)(a) to (d). In effect, if the property disposed of is not described in any of paragraphs 13(38)(a) to (d), then subsection 13(38) does not apply to decrease the reduction (by the proceeds of disposition) of the undepreciated capital cost of the class.

Subsection 13(38) also does not apply if one of the following rollover provisions applies in respect of the disposition: subsection 24(2), 70(5.1), 73(3.1), 85(1), 88(1), 93(3) or (5), 107(2) or 107.4(3).

Paragraph 13(38)(a), which applies to property (other than goodwill) that is acquired before January 1, 2017, provides that the capital cost of the property deemed to be acquired under subsection 13(38) is limited to 1/4 of the capital cost of the property that is disposed of.

Paragraph 13(38)(b) applies to a disposition of property if:

• the property is not goodwill,
• the property was acquired on or after January 1, 2017 by the taxpayer, and
• subsection 13(39) deemed an amount to have been allowed to a person under paragraph 20(1)(a) in respect of the taxpayer’s acquisition of the property.

If paragraph 13(38)(b) applies, the capital cost of the property deemed to be acquired under subsection 13(38) is limited to the amount that subsection 13(39) deemed to have been allowed to a person under paragraph 20(1)(a) in respect of the taxpayer’s acquisition of the property.

Paragraph 13(38)(c) applies to a disposition of property if:

• the property is not goodwill,
• the property was acquired on or after January 1, 2017 by the taxpayer,
• one of the following “rollover” provisions applied in respect of the acquisition of the property: subsection 24(2), 70(5.1), 73(3.1), 85(1), 88(1), 93(3) or (5), 107(2) or 107.4(3), and
• the property was acquired from a person or partnership that would have been deemed under subsection 13(38) to have acquired a property if none of those rollover subsections had applied.

If paragraph 13(38)(c) applies, the capital cost of the property deemed to have been acquired under subsection 13(38) is limited to the amount of the capital cost of the property that would have been deemed under subsection 13(38) to have been acquired by the person or partnership.

Paragraph 13(38)(d) applies to a disposition of goodwill and applies in a manner similar to paragraphs 13(38)(a) to (c). That is, the capital cost of the property deemed to have been acquired under subsection 13(38) is limited to the amount by which the total of

• generally, 1/4 of the deemed capital cost of goodwill as at the beginning of January 1, 2017,
• the amount, if any, deemed by subsection 13(39) to have been allowed to a person in respect of the taxpayer’s acquisition of goodwill on or after January 1, 2017, and
• if the taxpayer acquires goodwill on or after January 1, 2017 to which one of the rollover provisions applies, the corresponding amount, if any, that would have been deemed by subsection 13(38) to have been the cost of a property acquired by a person or partnership if none of those rollover provisions had applied

exceeds

• the total of all amounts deemed under subsection 13(38) to have been a capital cost of goodwill in respect of a previous disposition of goodwill.

The interaction of subsections 13(38) and (39) is generally as follows:

• Subsection 13(38) is a relieving measure that may reduce the rate at which proceeds of a disposition reduce the undepreciated capital cost balance of the class, from 100% of proceeds to 75%, if a related eligible capital expenditure was made prior to January 1, 2017.
• To put a non-arm’s length transferee in a similar position to a transferor to which subsection 13(38) applies, subsection 13(39) may decrease the rate at which an expenditure increases the undepreciated capital cost balance of the class of the transferee, from 100% of the expenditure to 75%, to the extent that subsection 13(38) applied to the transferor. However, subsection 13(38) may provide relief to the transferee when the transferee subsequently disposes of the property.
• Subsection 13(38) does not apply if a rollover provision applies to deem the proceeds of a transferor to be an amount. In such a case, 100% of the proceeds will be relevant in computing the transferor’s undepreciated capital cost, but at the same time that amount will be added to the transferee’s undepreciated capital cost. However, subsection 13(38) may provide relief to the transferee when the transferee subsequently disposes of the property.

Non-arm’s length transfers

ITA
13(39)

Subsection 13(39) decreases the undepreciated capital cost of the class in certain circumstances where a taxpayer acquires property included in new Class 14.1. Although subsection 13(38) increases the undepreciated capital cost balance of the new class by, generally, 25% of the proceeds of disposition of property that was ECP before January 1, 2017, new subsection 13(39) is intended to prevent taxpayers from increasing the depreciable base of a property through the use of a non-arm’s length transfer of depreciable property that was an eligible capital property.

Paragraph 13(39) applies to an acquisition of property if:

• a taxpayer acquires a property included in Class 14.1,
• the acquisition of the property is part of a transaction or series of transactions or events that includes a prior disposition of the property or a similar property by the taxpayer or a person or partnership that does not deal at arm’s length with the taxpayer, and
• subsection 13(38) applies in respect of the prior disposition.

Where subsection 13(39) applies to an acquisition, an amount is deemed to have been allowed to the taxpayer in respect of the property under regulations made under paragraph 20(1)(a) in computing the taxpayer’s income for taxation years ending before the acquisition of the property, generally equal to 1/4 of the capital cost of the property.  (However, this amount will not exceed the amount, if any, deemed by subsection 13(38) to be an addition to the undepreciated capital cost of the non-arm’s length vendor of the property.)

To prevent excess recapture when the property is disposed of by the taxpayer, subsection 13(38)(b) provides that where a taxpayer disposes of a property to which subparagraph 13(39) applied, the taxpayer is deemed to have acquired a depreciable property, at the time the taxpayer disposes of the property, equal to the lesser of the amount deemed by subsection 13(39) to have been allowed in respect of the acquisition of the property and 1/4 of the lesser of the proceeds of disposition of the property and the capital cost of the property.

Definitions

ITA
13(40)

Subsection 13(40) provides that, for the purposes of subsections 13(37) to (39) and 40(13) to (16), the definitions “cumulative eligible capital”, “eligible capital expenditure”, “eligible capital property” and “exempt gains balance” have the same meanings that would be assigned to those expressions if the Act read as it did immediately before January 1, 2017. This is intended to ensure that in determining the meaning of those definitions, the Act is to be read as if the ECP rules were not repealed.

Clause 64

Eligible capital property rules

ITA
14

The eligible capital property (ECP) rules in section 14 of the Act govern the tax treatment of certain expenditures (certain outlays and expenses described in the definition “eligible capital expenditure” in subsection 14(5)) and receipts (amounts described by E in the definition “cumulative eligible capital” in subsection 14(5)) that are not otherwise accounted for as business revenues or expenses, or under the rules relating to capital property.

Eligible capital property includes goodwill, customer lists and licences, franchise rights and farm quotas of indefinite duration. The cost of eligible capital property is recognized, for income tax purposes, in a pool system similar to the capital cost allowance (CCA) system for depreciable property. Unlike for CCA, however, only 3/4 of the cost is added to the pool, and only 3/4 of the proceeds of disposition of eligible capital properties is credited against the pool. A deduction from the cumulative eligible capital pool is allowed under paragraph 20(1)(b) at a 7% rate on a declining balance basis. A negative balance at the end of a taxation year results in an income inclusion for the year under subsection 14(1), which may be comprised of a portion analogous to recaptured CCA deductions under paragraph 14(1)(a) and a portion analogous to a taxable capital gain under 14(1)(b).

The ECP rules are repealed and replaced by new Class 14.1 of depreciable property under the capital cost allowance (CCA) regulations. As a consequence, property that was ECP is capital property and expenditures and receipts that were accounted for under the ECP rules are accounted for under the rules for depreciable property and capital property.

Clause 65

Deductions

ITA
20

Section 20 of the Act provides rules relating to the deductibility of certain outlays, expenses, and other amounts in computing a taxpayer’s income for a taxation year from business or property.

Allowance from cumulative eligible capital

ITA
20(1)(b)

Paragraph 20(1)(b) provides a deduction in calculating a taxpayer’s income from a business of up to 7 per cent of the taxpayer’s cumulative eligible capital property pool at the end of the year.

Paragraph 20(1)(a) of the Act and Parts XI and XVII and Schedules II to VI to the Income Tax Regulations (the Regulations) provide similar rules in respect of depreciable property. Paragraph 20(1)(a) provides for the deduction of such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation. As a result of the creation of new Class 14.1 of Schedule II to the Regulations, property that was eligible capital property under the eligible capital property rules will be depreciable property of the new class. New subparagraph 1100(1)(a)(xii.1) of the Regulations provides that deductions in respect of property in Class 14.1 are allowed at a 5% rate. As well, for taxation years that end before 2027, new paragraph 1100(1)(c.1) generally allows an additional 2% in respect of that portion of the undepreciated capital cost of the class that relates to expenditures incurred before January 1, 2017.

Paragraph 20(1)(b) of the Act is repealed, consequential on the repeal of the eligible capital property rules.

This repeal comes into force on January 1, 2017.

New paragraph 20(1)(b) provides rules allowing the deduction of incorporation expenses of up to $3,000 per corporation. Incorporation expenses in excess of $3,000 will be included in new class 14.1.

New paragraph 20(1)(b) applies to incorporation expenses incurred after 2016.

Clause 66

Meaning of capital gain and capital loss

ITA
39(1)(a)(i)

Section 39 of the Act sets out the meaning of capital gain, capital loss and business investment loss.

Subparagraph 39(1)(a)(i) provides that no capital gain arises on the disposition of eligible capital property. This subparagraph is repealed, consequential on the repeal of the eligible capital property rules.

For further information, see the commentary on subsections 40(13) and (14) and new Class 14.1 of Schedule II to the Income Tax Regulations.

Clause 67

Capital gain and capital loss

ITA
40

Section 40 provides rules for determining a taxpayer’s gain or loss from the disposition of capital property.

Class 14.1 — transitional rules

ITA
40(13) and (14)

Subsection 40(14) reduces the capital gain of a taxpayer from the disposition of a property included in Class 14.1 in certain circumstances. This reduction is related to the 1988 conversion of the cumulative eligible capital pool from a 1/2 to a 3/4 inclusion rate. Variable C of the formula in former paragraph 14(1)(b) provided for a similar reduction.

Subsection 40(13) provides that subsection 40(14) applies in respect of a disposition by a taxpayer of a property included in new Class 14.1 if

1. the property was an eligible capital property of the taxpayer immediately before January 1, 2017,
2. the amount determined for Q in the definition “cumulative eligible capital” in former subsection 14(5) immediately before January 1, 2017 is greater than nil,
3. the amount determined for B in the definition “cumulative eligible capital” in former subsection 14(5) immediately before January 1, 2017 is nil, and
4. no amount is included in the taxpayer’s income for a taxation year because of paragraph 13(37)(d).

Where subsection 40(14) applies in respect of a disposition, the taxpayer’s capital gain from the disposition is reduced by such amount as the taxpayer claims, not exceeding 2/3 of the amount determined for Q in the definition “cumulative eligible capital” in subsection 14(5) in respect of the business immediately before January 1, 2017. The cumulative amount claimed under 40(14) in respect of all dispositions of a taxpayer in respect of a business therefore cannot exceed 2/3 of the amount determined for Q in the definition “cumulative eligible capital” in subsection 14(5) in respect of the business immediately before January 1, 2017.

Subsections 40(13) and (14) come into force on January 1, 2017.

Class 14.1 — transitional rules

ITA
40(15) and (16)

Subsection 40(16) reduces the capital gain of a taxpayer from the disposition of a property included in Class 14.1 in certain circumstances. This reduction is related to the 1994 elimination of the $100,000 lifetime capital gains exemption. Variable D of the formula in former paragraph 14(1)(b) provided for a similar reduction.

Subsection 40(15) provides that subsection 40(16) applies in respect of a disposition by an individual of a property included in new Class 14.1 if

1. the property was an eligible capital property of the taxpayer immediately before January 1, 2017, and
2. the individual’s exempt gains balance in respect of the business is greater than nil for the taxation year that includes January 1, 2017.

Where subsection 40(16) applies in respect of a disposition, the individual’s capital gain from the disposition is reduced by such amount as the taxpayer claims, not exceeding twice the amount of the individual’s exempt gains balance in respect of the business for the taxation year that includes January 1, 2017. The cumulative amount of reductions under 40(16) in respect of all dispositions of an individual in respect of a business therefore cannot exceed twice the amount of the individual’s exempt gains balance in respect of the business for the taxation year that includes January 1, 2017. As well, the cumulative amount of reductions is reduced by the amount determined for D in paragraph 14(1)(b) for the purposes of paragraph 13(37)(d) if paragraph 13(37)(d) applied in respect of the business for the individual’s taxation year that includes January 1, 2017.

Subsections 40(15) and (16) come into force on January 1, 2017.

Clause 68

Capital gain - definitions

ITA
54

Section 54 of the Act provides definitions for the purposes of the rules for the calculation of taxable capital gains and allowable capital losses.

“eligible capital property”

The definition “eligible capital property” in section 54 is repealed, consequential on the repeal of the eligible capital property rules and the creation of new Class 14.1 of Schedule II to the Income Tax Regulations. The definition “eligible capital property” in subsection 248(1) is also repealed.

This repeal comes into force on January 1, 2017.

Clause 69

Definitions

ITA
248(1)

Subsection 248(1) provides a number of definitions that apply for the purposes of the Act.

“adjustment time”

The definition “adjustment time” in subsection 248(1), which relates to the eligible capital property rules, is repealed consequential to the repeal of section 14, including the definition “adjustment time” in subsection 14(5).

This amendment comes into force on January 1, 2017.

“cumulative eligible capital”

The definition “cumulative eligible capital” in subsection 248(1), which relates to the eligible capital property rules, is repealed consequential to the repeal of section 14, including the definition “cumulative eligible capital” in subsection 14(5).

This amendment comes into force on January 1, 2017.

“eligible capital amount”

The definition “eligible capital amount” in subsection 248(1), which relates to the eligible capital property rules, is repealed consequential to the repeal of section 14, including the definition “eligible capital amount” in subsection 14(1).

This amendment comes into force on January 1, 2017.

“eligible capital expenditure”

The definition “eligible capital expenditure” in subsection 248(1), which relates to the eligible capital property rules, is repealed consequential to the repeal of section 14, including the definition “eligible capital expenditure” in subsection 14(5).

This amendment comes into force on January 1, 2017.

“eligible capital property”

The definition “eligible capital property” in subsection 248(1), which relates to the eligible capital property rules, is repealed consequential to the repeal of section 14, as well as the definition “eligible capital property” in section 54.

This amendment comes into force on January 1, 2017.

“property”

The definition “property” in subsection 248(1) is amended to provide that the goodwill of a business is property for the purposes of the Act.

This amendment comes into force on January 1, 2017.

Income Tax Regulations

Clause 70

ITR
1100

Capital cost allowance

Part XI of the Income Tax Regulations (the Regulations) provides rules relating to capital cost allowance.

Rates

ITR
1100(1)(a)(xii.1)

Subsection 1100(1) of the Regulations sets out the rates of capital cost allowance that taxpayers may claim under paragraph 20(1)(a) of the Act with respect to specified classes of depreciable property.

New subparagraph 1100(1)(a)(xii.1) provides that (subject to subsection 1100(2), which provides the half-year rule) a taxpayer is allowed to deduct an amount, in respect of property of new Class 14.1, not exceeding 5% of the undepreciated capital cost to the taxpayer at the end of the taxation year of property of the class.

An additional allowance is also available under new paragraph 1100(1)(c.1) in respect of Class 14.1 property acquired before January 1, 2017.

Subparagraph 1100(1)(a)(xii.1) comes into force on January 1, 2017.

Additional allowances – Class 14.1

ITR
1100(1)(c.1)

New paragraph 1100(1)(c.1) of the Regulations provides an additional allowance in respect of Class 14.1 property of a business acquired before January 1, 2017. For taxation years that end before 2027, paragraph 1100(1)(c.1) allows a taxpayer an additional allowance of 2% of the undepreciated capital cost (UCC) of the class at the beginning of January 1, 2017, less the total of any amounts deducted under this paragraph in preceding taxation years and three times any amounts added to the UCC of the class under subsection 13(38) of the Act (which represents the amount of reductions to the UCC as a result of amounts received to which the relieving provision in subsection 13(38) applies – for further information, see the commentary on subsection 13(38) of the Act).  

Further, if the total of that additional allowance and the amount deductible under subparagraph 1100(1)(a)(xii.1) is less than $500, the additional allowance may be increased to allow $500 total capital cost allowance for the class. However, in no case may the additional allowance for a taxation year exceed the UCC of the class at the beginning of January 1, 2017 (net of additional allowances for preceding years), nor may the additional allowance cause the total amount deductible under paragraph 20(1)(a) of the Act for the year in respect of the class to exceed the UCC balance (before taking any such deduction).

Paragraph 1100(1)(c.1) comes into force on January 1, 2017.

Clause 71

Capital cost allowance – prescribed classes

ITR
Schedule II

Schedule II to the Regulations lists the properties that can be included in each capital cost allowance (CCA) class. A portion of the capital cost of depreciable property is deductible as CCA each year. CCA rates for each type of property, identified by their CCA classes, are set out in section 1100 of the Regulations.

New Class 14.1 (5% CCA rate) applies to certain intangible properties that would otherwise not be included in any other class. The description of property in the class is based in principle on the definition “eligible capital expenditure” in former subsection 14(5) of the Act. This class includes goodwill and property that was eligible capital property of the taxpayer immediately before January 1, 2017 and owned by the taxpayer at the beginning of January 1, 2017.

The class also includes property, in respect of a business, acquired on or after January 1, 2017, other than

1. property that is tangible property or corporeal property,
2. property that is not acquired for the purpose of gaining or producing income from business,
3. property in respect of which any amount is deductible (otherwise than as a result of being included in this class) in computing the taxpayer’s income from the business,
4. property in respect of which any amount is not deductible in computing the taxpayer’s income from business because of any provision of the Act (other than paragraph 18(1)(b)) or the Regulations,
5. an interest in a trust,
6. an interest in a partnership,
7. a share, bond, debenture, mortgage, hypothecary claim, note, bill or other simple property, or
8. an interest in, or for civil law a right in, or a right to acquire a property described in any of (i) to (vii).

Subsection 1101(1) of the Regulations provides for a separate class in respect of each business of a taxpayer. This is consistent with the application of the former eligible capital property rules, which provided for a separate cumulative eligible capital pool for each business of a taxpayer.

This amendment comes into force on January 1, 2017.

Consequential Amendments

Further consequential changes to the Income Tax Act and Income Tax Regulations are required to give effect to the conversion of eligible capital property to class 14.1, including amendments to section 13, paragraph 20(1)(hh.1), subsections 20(4.2) and (4.3), section 24, subsections 25(3) and 28(1), section 56.4, subsections 69(5), 70(3.1), (5.1) and (9.8), 73(3) and (3.1) and 79(4), sections 80 and 85, subsections 87(2) and 88(1), clauses 95(2)(d.1)(ii)(B), (e)(v)(A) and (f.11)(ii)(A), subsections 96(3) and (8), 97(2), 98(3) and (5), 107(2) and 107.4(3), the definition “qualified farm or fishing property” in subsection 110.6(1), subsections 111(5.2), 126(4.4), 128.1(1) and (4), 139.1(4), 139.1(18) and 142.7(13), the definition “earned income” in subsection 146(1), subsection 149(10), the definition “transfer pricing capital adjustment” in subsection 247(1), the definitions “cost amount”, “former business property” and “taxable Canadian property” in subsection 248(1), and subsections 248(39) and 261(7) of the Income Tax Act, sections 20 and 21 of the Income Tax Application Rules and sections 600, 808, 1219 and 2411 of the Income Tax Regulations.

Excise Tax Act

Clause 13

Definition

ETA
123(1)

“capital property”

Subsection 123(1) of the Excise Tax Act (the Act) defines terms used in Part IX of the Act and in the Schedules to the Act relating to the goods and services tax/harmonized sales tax (GST/HST).

The existing definition “capital property” for GST/HST purposes in the Act largely parallels the definition “capital property” in the Income Tax Act. As a result, property of a person is capital property for GST/HST purposes if the property is also capital property for income tax purposes or would be capital property for income tax purposes if the person were a taxpayer under the Income Tax Act, except for property belonging to Class 12, 14, or 44 of Schedule II to the Income Tax Regulations. Since property that is currently eligible capital property (ECP) is effectively excluded from capital property under the Income Tax Act, ECP is also currently excluded from capital property for GST/HST purposes. 

Changes to the Income Tax Act to repeal the current ECP regime and replace it with a new capital cost allowance class – Class 14.1 – will result in all ECP becoming capital property under the Income Tax Act effective January 1, 2017. As a result, without amending the definition “capital property” for GST/HST purposes, these changes would also make ECP become capital property for GST/HST purposes.

The definition “capital property” for GST/HST purposes in the Act is amended to exclude property described in new Class 14.1 of Schedule II to the Income Tax Regulations. This amendment provides for property that was ECP under the Income Tax Act immediately prior to January 1, 2017 to remain excluded from the definition of capital property for GST/HST purposes as of January 1, 2017.

This amendment comes into force on January 1, 2017.

Streamlined Accounting (GST/HST) Regulations

Clause 9

Definitions

Streamlined Accounting (GST/HST) Regulations
2(1)

Existing subsection 2(1) of the Streamlined Accounting (GST/HST) Regulations (the Regulations) contains definitions of terms used in the Regulations.

“eligible capital property”

The definition “eligible capital property” in subsection 2(1) of the Regulations is repealed. This repeal is made as a consequence of the repeal of the eligible capital property rules under the Income Tax Act, including the repeal of the definition “eligible capital property” in subsection 248(1) of that Act, and the creation of a new capital cost allowance class under that Act (i.e., Class 14.1 in Schedule II to the Income Tax Regulations). Under the existing GST/HST streamlined accounting rules, “eligible capital property” and “capital assets”, as defined in subsection 2(1), are subject to similar treatment. Accordingly, to maintain this similar treatment subsequent to the repeal of the definition “eligible capital property”, property that was formerly included under that definition will now be included under the definition “capital asset”.

This amendment applies in respect of supplies made on or after January 1, 2017.

“capital asset”

The definition “capital asset” in subsection 2(1) of the Regulations is amended by setting out the existing meaning of “capital asset” under new paragraph (a) of the definition and by adding new paragraph (b). As a result of the creation of new Class 14.1 in Schedule II of the Income Tax Regulations, property that was formerly included in the definition “eligible capital property” in subsection 2(1) will become capital property within the meaning of the Income Tax Act and therefore will now be included under paragraph (a) of the definition “capital asset”.

New paragraph (b) includes certain other property within the meaning of capital asset. In particular, if a supply of property was made at any time before January 1, 2017 and the property was considered eligible capital property at that time within the meaning of the Income Tax Act, the property would not have been considered capital property within the meaning of that Act. As a result, the property would not fall under paragraph (a) of the definition “capital asset”. Accordingly, to maintain consistency under the GST/HST streamlined accounting rules for such property that was formerly included in the repealed definition “eligible capital property”, paragraph (b) results in the property being included in the definition “capital asset”.

This amendment comes into force on January 1, 2017.

Basic Threshold Amount

Streamlined Accounting (GST/HST) Regulations
2(2)

Existing subsection 2(2) of the Regulations sets out the formula to calculate the basic threshold amount for a reporting period of a registrant for the purposes of the Regulations. For a registrant that is using the Quick Method of Accounting, the basic threshold amount is relevant in determining the quick-method remittance rate of the registrant under subsection 15(5) of the Regulations.

The descriptions of A and B in the formula are amended to remove references to “eligible capital property” as a consequence of the repeal of the definition “eligible capital property” in subsection 2(1).

This amendment comes into force on January 1, 2017.

Total Threshold Amount

Streamlined Accounting (GST/HST) Regulations
2(3)

Existing subsection 2(3) of the Regulations sets out the formulas to determine the total threshold amount for a reporting period of a registrant for the purposes of the Regulations. The total threshold amount is relevant in ascertaining the registrant’s eligibility under section 16 of the Regulations to determine its net tax using the Quick Method of Accounting.

The descriptions of A and B in the formula in paragraph 2(3)(a) are amended to remove references to “eligible capital property” as a consequence of the repeal of the definition “eligible capital property” in subsection 2(1). Similarly, the descriptions of D and E in the formula in paragraph 2(3)(b) are amended to remove references to “eligible capital property” as a consequence of the repeal of the same definition.

This amendment comes into force on January 1, 2017.

Clause 10

Definitions

Streamlined Accounting (GST/HST) Regulations
15(1)

Existing subsection 15(1) of the Regulations contains definitions of terms used in Part IV of the Regulations, which relates to the Quick Method of Accounting for GST/HST.

“specified property”

The definition “specified property” in subsection 15(1) of the Regulations is amended to remove a reference to “eligible capital property” as a consequence of the repeal of the definition “eligible capital property” in subsection 2(1) of the Regulations.

This amendment comes into force on January 1, 2017.

“specified supply”

Paragraph (a) of the definition “specified supply” in subsection 15(1) of the Regulations is amended to remove a reference to “eligible capital property” as a consequence of the repeal of the definition “eligible capital property” in subsection 2(1) of the Regulations.

This amendment comes into force on January 1, 2017.

Clause 11

Definitions

Streamlined Accounting (GST/HST) Regulations
19(1)

Existing subsection 19(1) of the Regulations contains definitions of terms used in Part V of the Regulations, which relates to the Special Quick Method of Accounting for GST/HST.

“specified property”

The definition “specified property” in subsection 19(1) of the Regulations is repealed. This repeal is made as a consequence of the repeal of the definition “eligible capital property” in subsection 2(1) of the Regulations. Other than eligible capital property, the existing meaning of specified property includes only capital assets of a registrant. Therefore, the defined term “specified property” is no longer needed and existing references to “specified property” in Part V of the Regulations are replaced with references to capital assets.

This amendment comes into force on January 1, 2017.

“designated supply”

Paragraph (a) of the definition “designated supply” in subsection 19(1) of the Regulations is amended to remove a reference to “eligible capital property” as a consequence of the repeal of the definition “eligible capital property” in subsection 2(1) of the Regulations.

This amendment comes into force on January 1, 2017.

“specified supply”

Paragraphs (b) and (c) of the definition “specified supply” in subsection 19(1) of the Regulations are amended to replace references to “specified property” with references to “capital assets” as a consequence of the repeal of the definition “specified property” in subsection 19(1) of the Regulations.

This amendment comes into force on January 1, 2017.

Special Quick-Method Rate – University or Public College

Streamlined Accounting (GST/HST) Regulations
19(3)(c)(i)

The description of B in the formula in subparagraph 19(3)(c)(i) of the Regulations is amended to replace a reference to “specified property” with a reference to “capital assets” as a consequence of the repeal of the definition “specified property” in subsection 19(1).

This amendment comes into force on January 1, 2017.

Clause 12

Calculation of Net Tax

Streamlined Accounting (GST/HST) Regulations
21(1)

Existing subsection 21(1) of the Regulations sets out the calculation that generally applies to determine the net tax for a reporting period of a registrant if the registrant has elected to determine its net tax using the Special Quick Method of Accounting set out under Part V of the Regulations.

Subparagraphs (a)(ii) and (iii) of the description of C in the first formula in subsection 21(1) are amended to replace references to “specified property” with references to “capital assets” as a consequence of the repeal of the definition “specified property” in subsection 19(1) of the Regulations.

This amendment comes into force on January 1, 2017.