The 2016 Federal Budget proposed changes to the Income Tax Act (Canada), expected to come into force effective January 1, 2017, that will alter the manner in which the sale of certain intangible property, such as goodwill, is taxed. Specifically, a Canadian-controlled private corporation (CCPC) that is selling its business by way of an asset sale will incur an increased immediate tax liability upon the disposition of such intangible property.

As such, business owners contemplating a sale of their business should consider the advantages of (i) completing the sale of such assets prior to these legislative changes coming into force; or (ii) crystallizing certain gains accrued on such intangible property through a corporate reorganization.


Under the current tax regime, there are certain expenditures of a capital nature incurred by a corporation that are neither deductible as a business expense, nor treated as a capital property subject to depreciation pursuant to the capital cost allowance rules. These expenditures are incurred by a corporation to acquire certain types of intangible property for the purpose of earning business income. This type of asset is referred to as eligible capital property (ECP), which includes goodwill, customer lists, franchise rights, and other intangibles.

Current ECP regime

Under the current tax regime:

  1. 75 percent of ECP is included in a cumulative eligible capital (CEC) pool.
  2. An annual deduction of 7 percent of the CEC pool on a declining balance basis is allowed to be deducted from the active business income related to such ECP.
  3. 50 percent of any gain resulting from the disposition of ECP is taxable at the lower corporate business tax rate applicable to active business income, while the remaining 50 percent of any gain is captured in the CCPC’s capital dividend account and can be paid out to shareholders tax free.

Proposed amendments

Under the proposed tax regime:

  1. 100 percent (rather than 75 percent) of ECP acquired on or after January 1, 2017, will be included in a new class of depreciable property (class 14.1).
  2. An annual deduction of 5 percent (rather than 7 percent) will be applicable to the ECP on a declining basis.
  3. Any gains resulting from the disposition of ECP will be taxed as capital gains and as a result, subject to the higher tax rate applicable to investment income rather than the lower tax rate applicable to active business income.

Loss of tax-deferral advantage

Although billed as a simplification of the ECP rules, the repeal and replacement of the existing ECP rules, the creation of this new category of depreciable property, and the rules applicable thereto, and will result in a CCPC paying as much as 10 percent in additional refundable tax upon the disposition of goodwill. This is because under the present regime, income from the sale of goodwill is treated as active business income and not subject to refundable tax whereas, under the proposed regime, the sale of goodwill or intangibles will be treated as a taxable capital gain that is considered to be investment income which is subject to higher tax rates.

Because the proposed rules are intended to take effect on January 1, 2017, we encourage business owners who may otherwise be selling a business to consider the advantages of executing the sale during 2016.