Note
As of January1,2017, you can no longer claim the allowance on eligible capital expenditures. Property that formerly would have been eligible capital property is now considered depreciable property under the capital cost allowance rate of Class14.1.
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 Schedule3, 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
Balance in the account at the start of your fiscal period
$ Blank space for dollar value
Line1
Eligible capital expenditures you made or incurred in your fiscal period
$ Blank space for dollar value
× 75%
$ Blank space for dollar value
Line2
Line1 plus line2
$ Blank space for dollar value
Line3
All the amounts you received or are entitled to receive from the sale of eligible capital property in your fiscal period
$ Blank space for dollar value
Line4
All the amounts that became receivable in your fiscal period from the sale of eligible capital properties before June 18, 1987
$ Blank space for dollar value
Line 5
Line4 plus line5
$ Blank space for dollar value
Line6
Line6 × 75%
$ Blank space for dollar value
Line7
CEC account balance (Line3 minus line7)
$ Blank space for dollar value
Line8
Annual allowance (7% × line8)
$ Blank space for dollar value
Line9
CEC account balance at the end of your fiscal period (Line8 minus line9)
$ Blank space for dollar value
Line10
Note
An eligible capital expenditure is reduced by the amount of any assistance received or receivable from a government for the expenditure. Also, an amount forgiven (or entitled to be forgiven) on government debt reduces your CEC account. Special conditions may apply to non-arm's length transactions. For more information, go to Interpretation Bulletin IT-123, Transactions Involving Eligible Capital Property.
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.
Example
John started a business on January 1, 2017. John's business has a December 31 year-end. During 2017, he bought a franchise for $16,000. He calculates his maximum annual allowance of $840 for 2017 as follows:
John's CEC account
Balance at the start of John's 2017 fiscal period
$0
Line 1
John's eligible capital expenditure: franchise cost for the 2017 fiscal period: $16,000
× 75%
$12,000
Line 2
Line 1 plus line 2
$12,000
Line 3
John has not sold any eligible capital property during the 2017 fiscal period. Therefore, he will not have any amounts on lines 4 to 8.
John's maximum annual allowance on eligible capital property is 7% × line 3
$840
Line 9
Balance at the end of 2017 (line3 minus line9)
$11,160
Line 10
Forms and publications
- GuideT4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income
- GuideT4037, Capital Gains
- FormT2125, Statement of Business or Professional Activities
- Income Tax FolioS3-F3-C1, Replacement Property
- Interpretation BulletinIT-143, Meaning of Eligible Capital Expenditure
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