Eligible capital expenditures

Property that does not physically exist but gives you a lasting economic benefit is eligible capital property. The price you pay to buy eligible capital property is an eligible capital expenditure.

On this page:

• Eligible capital property
• Election to treat the disposition of an eligible capital property as a capital gain
• Replacement property
• Annual allowance
• Cumulative eligible capital (CEC) account
• How to calculate your annual allowance
• Calculating your annual allowance and CEC account balance at the end of your fiscal period

Eligible capital property

You may buy property that does not physically exist but gives you a lasting economic benefit. The CRA calls this kind of property eligible capital property.

Some examples are goodwill, franchises, concessions, or licences for an unlimited period.

The CRA considers franchises, concessions, or licences with a limited period to be depreciable properties, not eligible capital properties. For details about depreciable properties, go to Claiming capital cost allowance (CCA).

Election to treat the disposition of an eligible capital property as a capital gain

Under certain conditions, you can elect to treat the disposition of an eligible capital property (other than goodwill) as a regular capital gain. For example, properties such as a franchise, concession, or licence that has an unlimited life may qualify for this election.

By electing, you deem to remove the property from your cumulative eligible capital (CEC) account for proceeds equal to its original cost.

You can then declare a capital gain equal to your actual proceeds of disposition minus the cost of acquisition.

Report the details on the "Real estate, depreciable property and other properties" line of Schedule 3, Capital Gains (or Losses).

This election will benefit you if you have unused capital losses to apply against the capital gain.

The election is available if you meet the following conditions:

• you disposed of an eligible capital property other than goodwill
• the cost of the eligible capital property can be determined
• the proceeds of disposition exceed the cost
• you do not have an exempt gains balance

File your election by attaching a note to your paper income tax return or send it to your tax services office or tax centre. Be sure to include your name, address and social insurance number so that CRA can correctly identify your election.

Replacement property

If you sell an eligible capital property and replace it with another one for the same or similar use, you can choose to postpone all or part of any gain on the sale. You can postpone or defer adding a capital gain or recapture of capital cost allowance (CCA) to income.

You might sell a business property and replace it with a similar one, or your property might be stolen, destroyed, or expropriated and you replace it with a similar one. You can defer tax on the sale proceeds which you reinvest in replacement property within a reasonable period of time. To defer reporting the capital gain or recapture of CCA, you must acquire and you, or a person related to you, must use the new property for the same or similar purpose as the one that you are replacing.

This happens if you acquire a replacement eligible capital property within a certain period of time. To do this, you have to replace the property no later than one year after the end of the tax year in which you sell the original property.

You can also defer a capital gain or recapture of CCA when you transfer property to a corporation or a partnership.

Annual allowance

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

Cumulative eligible capital (CEC) account

This is the bookkeeping record you establish to determine your annual allowance. You also use your CEC account to keep track of the property you buy and sell. The CRA calls the property in your CEC account your eligible capital property. You base your annual allowance on the balance in your CEC account at the end of your fiscal period.

Keep a separate account for each business, but include all eligible capital property for the one business in the same CEC account.

How to calculate your annual allowance

Fill in the following chart to calculate your annual allowance and the balance in your cumulative eligible capital (CEC) account at the end of your fiscal period.

Calculating your annual allowance and CEC account balance at the end of your fiscal period

You can deduct an annual allowance if there is a positive balance (line 8) in your CEC account at the end of your fiscal period. You do not have to claim the full amount of the maximum annual allowance for a given year. You can deduct any amount you want, up to the maximum allowable of 7%. If your fiscal period is less than 365 days (366 days if a leap year), you have to prorate your claim. Base your claim on the number of days in your fiscal period compared to 365 days (366 days if a leap year).

If there is a negative balance in your CEC account, go to Sale of eligible capital property.

The following is an example of how to calculate the maximum annual allowance and account balance.

Forms and publications

• Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income
• Guide T4037, Capital Gains
• Form T2125, Statement of Business or Professional Activities
• Income Tax Folio S3-F3-C1, Replacement Property
• Interpretation Bulletin IT-143, Meaning of Eligible Capital Expenditure