Changes to the Eligible Capital Property Rules Effective January 1, 2017

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Eligible capital property (ECP) includes items such as goodwill, patents, trademarks, customer lists and other intangibles with no fixed lifespan.

As of January 1, 2017, the new rules for eligible capital property will come into effect and will have a significant impact on tax deferral opportunities for companies that dispose of eligible capital property.

Previous Rule

Under the previous rules (i.e. until December 31, 2016), if a company disposed of eligible capital property, half of the gain from the sale would be taxed as active business income at their applicable tax rate (25% or 13.5% if they qualify for the small business rate).  The other half would be added to the capital dividend account, which can be paid tax-free to the shareholders by declaring a capital dividend.

With the new eligible capital property rules in place, companies are losing the ability to defer tax and might be paying more tax

New Rule

Under the new rules, the disposal of eligible capital property will result in half of the amount being taxed as investment income at a rate of 50.67%. and the other half is added to the capital dividend account. It should be noted that a portion of the taxes paid on the investment income, up to 30.67%, is refundable when a taxable dividend is paid out to the shareholders.

With the new eligible capital property rules in place, companies are losing the ability to defer tax if the funds are retained in the corporation. There is an additional 6.5% of tax that has to be paid under the new rules, assuming the corporation qualifies for the small business rate.

If you have created a significant amount of goodwill in your business, you will want to contact your accountant to discuss taking advantage of the possible tax deferral.

If you would like more information or have any questions, feel free to contact us at 780.466.6204, or click here to send us an email.

Thanks to Johnny Kwong of KWB Chartered Accountants for providing this content.

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