Eligible Capital Property

Question 1

ECE System

Answer 1

• There is only one pool for all unlimited intangible properties (including goodwill)
• The CEC account is amortized on a declining basis to a maximum of 7% of balance in account.
• Add only 3/4 of ECE and deduct only 3/4 of proceeds (ECA)
• There is no half-year rule

At the end of each year, if the balance of CEC is

(a) positive and business continues:
* take CECA to maximum of 7% of the balance of CEC
(b) negative, for any taxation year after Oct. 17, 2000:, deduct:

1. lesser of
   
   1. the negative balance, and
   2. all CECA less recaptured amounts

PLUS

    2. 2/3 x (neg. bal minus amt. from one above) (c) positive, but business has been terminated, take the positive balance as a deduction from income (equivalent) to terminal loss)

(e)

Question 2

Election re: Capital Gain: (Conditions)

Answer 2

Conditions:

1. The property disposed msut be eligible capital property, but not goodwill
2. The cost of the property to the taxpayer must be determinable.
3. The proceeds of disposition of the property must exceed the cost.
4. The taxpayer’s exempt gain balance in respect of the business must be nil.
5. The taxpayer must elect in the taxpayer’s return of income for the year.

If conditions met:

• then, the proceeds of disposition of the property are deemed to be equal to the cost of that property;
• then, the taxpayer is deemed to dispose of a capital property with proceeds equal to the actual proceeds, and
• an adjusted cost base equal to the cost of the eligible capital property.

If the property disposed is an elibible capital property that is a qualified farm property, then the capital property deemed to be disposed is deemed to be a qualified farm property.

Question 3

Election re: Capital Gain (Application)

Answer 3

Election Made

• Disposal deemed proceeds equal 3/4 x cost of property (instead of LOCP)
• Inclusion in business income excludes the economic gain on eligible capital property (1/2 x capital gain). (This means that the economic gain will not be used to reduce the available cumulative eligible capital pool.)
• Instead, the taxable capital gain can be applied to available capital losses

No Election Made

• Disposal deemed proceeds equal 3.4 x actual proceeds
• Inclusion in business

Question 4

Examples of Eligible Capital Property

Answer 4

• Cost of purchased goodwill
• cost of a franshise for an indefinite life
• incorporation costs
• reorganization costs (e.g. reorganization of company’s share capital