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Eligible capital expenditures – farmers and fishers

You may buy property that has no physical existence, but gives you a lasting economic benefit. Some examples include milk and egg quotas, goodwill, franchises, concessions, or licences for an unlimited time period. This kind of property is eligible capital property. The price you pay to buy this kind of property is an eligible capital expenditure.

As of January 1, 2017, the eligible capital property (ECP) system was replaced with the new capital cost allowance (CCA) class 14.1 with transitional rules. Under the old system, eligible capital expenditures are added to the cumulative eligible capital pool at a 75% inclusion rate, and the rate of depreciation of those expenditures is 7% on a declining-balance basis. Under the new system, newly-acquired eligible properties will be included in class 14.1 at a 100% inclusion rate with a 5% capital cost allowance rate on a declining-balance basis.

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 included in class 14.1.

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Eligible capital expenditure

You may buy property that does not physically exist but gives you a lasting economic benefit.

This kind of property is eligible capital property. The price you pay to buy this type of property is an eligible capital expenditure.

We consider franchises, concessions, or licences with a limited period to be depreciable properties, not eligible capital properties. As of January 1, 2017, the eligible capital property (ECP) system was replaced with the new capital cost allowance (CCA) class 14.1 with transitional rules. For details on depreciable properties, go to Chapter 4 of guide T4002 , Self-employed Business, Professional, Commission, Farming, and Fishing Income.

Annual allowance

You cannot fully deduct an eligible capital expenditure because the expenditure is considered to be capital and provides a lasting economic benefit. However, you can deduct part of its cost each year. We call the amount you can deduct your annual allowance.

CEC account

This is the bookkeeping record you establish to determine your annual allowance. You also use your cumulative eligible capital (CEC) account to keep track of the property you buy and sell. We call the property in your CEC account your eligible capital property. You base your annual allowance on the balance in your account at the end of your fiscal period. Keep a separate account for each business. Include all eligible capital property for the one business in the same CEC account.

Transitional rules – Undepreciated capital cost balance

Generally, the undepreciated capital cost (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 cumulative eligible capital (CEC) balance in respect of the business at the beginning of January 1, 2017.

Generally, the total capital cost of all property in Class 14.1 at the beginning of that day is deemed to be 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 that has not been recaptured before that day.

There are also rules for allocating total capital cost between goodwill property and each identifiable property in the new class that was an eligible capital property.

An amount is deemed to have been allowed as capital cost allowance 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.

Transitional rules – Deemed gain immediately before January 1, 2017

You may be able to include an amount in your income in a tax 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. An income inclusion may be required if you receive proceeds in that tax year and prior to January 1, 2017, such that there would have been an income inclusion if the tax year had instead ended immediately before January 1, 2017. You 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 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 tax year you acquired a property of the new class or you are deemed to have acquired goodwill, you may elect to reduce the income inclusion 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

Receipts related to expenditures incurred before January 1, 2017 cannot result in excess recapture when applied to reduce the balance of the new CCA class. 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 changes to the rules 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, the new rules also prevent the use of non-arm’s length transfers to increase the amount that can be depreciated in respect of the new class. Generally, when you acquire a property of the new class, only 3/4 of the capital cost of the property is included in the UCC in respect of the class if the following conditions apply:

  • the property or a similar property was previously an eligible capital property of yourself or a person or partnership not dealing at arm’s length with the taxpayer
  • the UCC was increased in respect of an earlier disposition of the property or similar property by yourself or the non-arm’s length person or partnership

This effect is achieved by deeming you 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 to have been added to the UCC of the new class of yourself or another person or partnership.

For more information about the old ECP rules, see the 2016 version of this guide.

For more information on changes to the ECP system, go to Explanatory Notes – Eligible Capital Property.

Eligible capital property of a deceased person

When a person dies, we deem that the person has disposed of all capital property right before death. Also, right before death, we deem that the person has received the deemed proceeds of disposition. For more information, go to Deemed disposition of property.

Partnerships

A partnership can own eligible capital property and ask to deduct an annual allowance for that property. Any income from the sale of eligible capital property the partnership owns is income of the partnership. For more information about eligible capital expenditures, go to Chapter 5 of guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.

Forms and publications

Related links

Original Source: https://www.canada.ca/en/revenue-agency/services/tax/businesses/farmers-fishers/eligible-capital-expenditures-farmers-fishers.html