Sale of eligible capital property

Note

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.

For more information, go to Class 14.1.

Sole proprietor sale of eligible capital property

When you sell eligible capital property, you have to subtract part of the proceeds of disposition from your cumulative eligible capital (CEC) account.

You have to do this calculation if you sold eligible capital property:

  • in your current fiscal period; or
  • before June 18, 1987, and the proceeds of disposition become due to you in your current fiscal period.

The amount you have to subtract is 75% of the total of these amounts:

  • the proceeds of disposition of all the eligible capital property you sell in your current fiscal period
  • the amount of any proceeds that become due to you in your current fiscal period from eligible capital property you sold before June 18, 1987

There may be a negative amount (excess) in your CEC account after you subtract the required amount. In this case, you will have to include part of the negative amount in your business income.

Multiply by 2/3 the part of the negative amount in your CEC account that exceeds the annual allowances deducted. To that result, add whichever is less, the excess or annual allowances deducted. This is the amount to include in your business income.

How to calculate the amount to include in your business income

Example

Lysa started her business on January 1, 2011 with a December 31 year-end. In 2011, Lysa bought a client list for $10,000. Lysa sold her business on September 1, 2016. She sold her client list for $15,000 and she does not have any other eligible capital property in her business. She deducted annual allowances each year as follows:

Annual allowances
Year Amount
2011 $525
2012 $488
2013 $454
2014 $422
2015 $393
2016 $365
Total for the years from 2011 to 2016 $2,647

The amount Lysa has to include in her business income on line 8230 - other income on Form T2125, Statement of Business or Professional Activities, is the total of amounts A and C calculated as follows:

Calculation of amount A:

Actual proceeds of disposition ($15,000) × 75%

$11,250

Plus: total annual allowances deducted

$2,647
(i)

Minus: Eligible capital expenditures ($10,000) × 75%

$7,500

Equals: Excess amount

$6,397
(ii)

The lesser of (i) and (ii)

$2,647
A

Calculation of amount B:

Excess amount

$6,397

Minus: total annual allowances deducted

$2,647

Equals

$3,750
B

Calculation of amount C:

Amount B ($3,750) × 2/3

$2,500
C

Taxable amount from the sale of client list

Amount A ($2,647) + Amount C ($2,500)

$5,147

Lysa would include $5,147 on line 8230, other income, in Part 3C of Form T2125.

Partnership sale of eligible capital property

When the partnership sells eligible capital property, it has to subtract part of the proceeds of disposition from its cumulative eligible capital (CEC) account.

The partnership has to do this calculation if it sold eligible capital property either:

  • in its current fiscal period
  • before June 18, 1987, and the proceeds of disposition become due in its current fiscal period

The amount the partnership has to subtract is 75% of the total of these amounts:

  • the proceeds of disposition of all the eligible capital property the partnership sells in its current fiscal period. The total proceeds of disposition have to be included even if the partnership will not receive the entire amount in the year
  • the amount of any proceeds that become due in the partnership's current fiscal period from eligible capital property it sold before June 18, 1987

The partnership's CEC account may have a negative amount (excess) after it subtracts the required amount. In this case, the partnership will have to include part of the negative amount in its business income.

Multiply by 2/3 the part of the negative amount in your CEC account that exceeds the annual allowances deducted. To that result, add the lesser of the excess and annual allowances deducted. This is the amount to include in the partnership business income. The following example shows how to calculate the amount to include in your business income.

The partnership has to include the business income that results from the sale of the eligible capital property on line 8230 other income, in Part 3C of Form T2125.

Exempt capital gains balance

If you, as a partner in the partnership, have made the capital gains election by filing Form T664, Election to Report a Capital Gain on Property Owned at the end of February 22, 1994, with your 1994 income tax return for your partnership interest, you will have reported the capital gain accrued to February 22, 1994. In this case, the adjusted cost base of your partnership interest has not changed as a result of the election. Rather, you have created a special account called your exempt capital gains balance (ECGB).

Your ECGB expired after 2004. If you did not use all of your ECGB by the end of 2004, you can add the unused balance to the adjusted cost base of your shares of, or interest in, the flow-through entity.

Example

You and your partner have operated a telephone sales business since January 1, 1994. Your partnership agreement states that you and your partner will share the business profits equally. The business has a December 31 year-end. You and your partner paid a total of $10,000 for a client list when you started the business.

The business has no other eligible capital property. You and your partner sell the business on September 1, 2016. The proceeds of disposition of the client list are $15,000. As a partner of the partnership, you made the capital gains election in 1994 on your partnership interest and your current exempt capital gains balance (ECGB) is nil. In previous years, the partnership claimed $2,647 as annual allowances on eligible capital property.

Calculation of amount to include in business income - Sale of client list on September 1, 2016

The amount to include in the partnership's business income on line 8230, other income, on Form T2125 is the total of amounts A and C:

Calculation of amount A:

Actual proceeds of disposition ($15,000) × 75%

$11,250

Plus: total annual allowances deducted

$2,647
(i)

Minus: (Eligible capital expenditures ($10,000) + ECGBFootnote 1  ($0)) × 75%

$7,500

Equals: Excess amount

$6,397
(ii)

The lesser of (i) and (ii)

$2,647
A

Calculation of amount B:

Excess amount

$6,397

Minus: total annual allowances deducted

$2,647

Equals

$3,750
B

Calculation of amount C:

Amount B ($3,750) × 2/3

$2,500
C

Taxable amount from the sale of client list

Amount A ($2,647) + Amount C ($2,500)

$5,147

According to this example, you should include $5,147 on line 8230, other income, in Part 3C of Form T2125.

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