In general, eligible capital property is intangible property used for the purpose of earning business income which does not qualify as depreciable property. For instance, goodwill, quotas and taxi permits are eligible capital property.
The deduction for eligible capital property that a taxpayer may claim when calculating his or her business income corresponds to 7% of the cumulative eligible capital (CEC) for the business at the end of the year. Note that the deduction is not reduced when the business' taxation year is less than 12 months.
The CEC corresponds to:
- 75% of eligible capital expenditures;
- less 75% of the proceeds of disposition of eligible capital property;
- less deductions claimed in prior fiscal periods.
When the CEC becomes negative as a result of the disposition of eligible capital property, the CEC balance constitutes business income.
When the CEC remains positive after the disposition of eligible capital property, the regular 7% deduction is still permitted. However, when the taxpayer ceases to carry on business, the full CEC balance is deducted in the calculation of business income.
Qualified Farm or Fishing Property
If the eligible capital property is qualified farm or fishing property, the negative CEC balance, although qualified as "business income," may give rise to the capital gains deduction.
Election to Report a Capital Gain on Property Owned on February 22, 1994 (Form T664)
If the election to report a capital gain on property owned on February 22, 1994, has been made by the taxpayer with respect to a partnership interest, the capital gain deemed to arise from this election created an exempt capital gains balance with regards to the interest. This balance is used to reduce the share of the partnership’s income resulting from the sale of eligible capital property (other than recapture of the annual deductions made in the preceding years).
Québec only
Certain eligible capital property can give rise to a more advantageous deduction in Québec.
Introduction of class 14.1 for eligible capital property
On October 25, 2016, the federal government tabled Bill C-29, A second Act to implement certain provisions of the budget tabled in Parliament on March 22, 2016 and other measures, which proposes the introduction of class 14.1 for eligible capital property.
To manage the transition between Cumulative Eligible Capital Form and class 14.1, the following lines have been added to T2125/T2042 Cumulative Eligible Capital Form:
- Does the taxation year of the business include January 1, 2017, or ends after that date?;
- Was the eligible capital property disposed of before January 1, 2017?;
- Does the business make the election under subparagraph 13(38)(d)(iii) ITA?; and
- Data in this form is transferred to class 14.1 of 2125/2042 CCA workchart (T2125/T2042 CEC Form is no longer applicable).
Taxprep automatically selects the check box of the line Data in this schedule is transferred to class 14.1 of 2125/2042 CCA workchart (T2125/T2042 CEC Form is no longer applicable). when the answer to the question Does the taxation year of the business include January 1, 2017, or ends after that date? is “Yes” and an amount calculated on line D of T2125/T2042 CEC.
When the check box of line Does the taxation year of the business include January 1, 2017, or ends after that date? is selected, the transfer of the amounts calculated in T2125/T2042 CEC to the T2125/T2042 concerned is cancelled, and certain forms cease being applicable.
Here are the forms that stop being applicable in the above-described situation:
- T2125/TP-80 Cumulative Eligible Capital (Jump Code: 2125/Q80 CEC); and
- T2042/Q2042 Cumulative Eligible Capital (Jump Code: 2042/Q2042 CEC).
When the answer to the question Does the business make the election under subparagraph 13(38)(d)(iii) ITA? is “Yes” for a taxation year that includes January 1, 2017, Taxprep:
T2125:
- enters the amount from line U on line 8230 of T2125 Form; and
- enters the amount from line V as a negative adjustment in class 14.1 of T2125 CCA workchart.
T2042:
- enters the amount from line U on line 9600 of T2042 Form; and
- enters the amount from line V as a negative adjustment in class 14.1 of T2042 CCA workchart.
Finally, note that the following forms are not rolled forward for business that have a taxation year including January 1, 2017, or ending after that date:
- T2125/TP-80 Cumulative Eligible Capital (Jump Code: 2125/Q80 CEC); and
- T2042/Q2042 Cumulative Eligible Capital (Jump Code: 2042/Q2042 CEC).