Eligible capital property (Class 14.1)

Class 14.1 will automatically be created in the following forms, from the information contained in those forms, if the business’s taxation year straddles January 1, 2017, and the answer to the question Does the fiscal year of the business include January 1, 2017 or ends after that date? is “Yes” in Form:

• T2042, Cumulative Eligible Capital (Jump Code: 2042 CEC)
• T2121, Cumulative Eligible Capital (Jump Code: 2121 CEC)
• T2125, Cumulative Eligible Capital (Jump Code: 2125 CEC)
• T1163, Cumulative Eligible Capital (Jump Code: 1163 CEC)
• T1273, Cumulative Eligible Capital (Jump Code: 1273 CEC)

In cases where the taxation year starts on January 1, 2017, the class will be created when the client file is rolled forward.

Cumulative eligible capital (CEC) balance (positive or negative) in respect of the business on January 1, 2017 (line G)

To calculate the deemed capital cost of property for this class, enter the cumulative eligible capital (CEC) amount on January 1, 2017. Taxprep input amount D (or amount F, when rolling forward) from Forms T2042, T2121, T2125, T1163 and T1273 relating to eligible capital.

If the CEC balance is negative, enter the amount that would need to be included in income pursuant to paragraph 14(1)(b) ITA, as that paragraph applied immediately before January1. 2017 (line H)

In cases where the CEC balance is negative at the time of the transfer, an amount to include must be taken into account in the calculation of the deemed capital cost of property in the class. Taxprep calculates this amount to include using amount U in Form T2042, T2121, T2125, T1163 or T1273 relating to eligible capital.

Deductions that reduced CEC in respect of the business for taxation years ending before January 1, 2017 (line I)

This amount is used to calculate the deemed capital cost of the property in the class. It will be calculated only if an amount in shown on line O of Form T2042, T2121, T2125, T1163 or T1273 relating to eligible capital. Otherwise, it will have to be entered manually.

If the election under subparagraph 13(38)(d)(iv) ITA is made for one property in the class, enter the capital gain or the amount to include in income

Where the business makes the election under subparagraph 13(38)(d)(iv) ITA upon acquiring a property in its taxation year straddles January 1, 2017, the capital gain to include in Schedule 3 should be reduced by the lesser of the following amounts: the gain to include itself or the capital cost of the property acquired. If the business also makes the election under 13(38)(d)(iii) ITA, the amount to include in Schedule 3 should then be reduced by the lesser of the following amounts: the amount itself or half of the capital cost of the property acquired.

Taxprep will calculate the capital gain or the amount to include if the answer on line The business makes the election under subparagraph 13(38)(d)(iv) ITA is “Yes” in the copy of the additions and dispositions workchart of Form T2042, T2121, T2125, T1163 or T1273 (Jump Code: T2042 CCA FA, T2121 CCA FA, T2125 CCA FA, T1163 CCA FA, or T1273 CCA FA) copies corresponding to the class and an amount is entered on line H. In cases where the election under subparagraph 13(38)(d)(iii) ITA is not made, the calculated capital gain should be entered manually in Schedule 3.

Deemed total capital cost of property in the class under paragraph 13(38)(a) ITA (line J)

This amount will be calculated based on the following formula:

(4/3 x [G + (3/2 x H) + I])

where

G is CEC balance (positive or negative) in respect of the business on January 1, 2017

H is the amount that would need to be included in income pursuant to paragraph 14(1)(b) ITA, as that paragraph applied immediately before January1. 2017, when the CEC balance is negative

I is all deductions that reduced CEC in respect of the business for taxation years ending before January 1, 2017.

Amount deemed allowed as a deduction against the capital cost of property in the class under paragraph 13(38)(c) ITA for taxation years ending before January 1, 2017 (line K)

The deemed CCA allowed is equal to the difference between the deemed total capital cost and the positive CEC balance at the time of the transfer.

In cases where le CEC balance entered on line G is negative, the amount calculated on line K will be limited to the amount on line G and will be entered on line UCC Adjustments under subsections13(38) and 13(39) ITA in order to calculate the CCA recapture for the class.

UCC balance in the class on January 1, 2017 (line L)

The UCC balance is equal to the difference between the deemed total capital cost and the deemed CCA allowed. Any positive result obtained will also be the UCC balance (opening) entered on line 1, if this amount is positive. In general, the UCC balance at the time the class is created will be equal to the CEC balance in respect of the business (line G).

CCA claimed with respect to this UCC balance in preceding taxation years (line M)

This is the total amount of the capital cost allowance (CCA) and the additional deduction that has been deducted from the UCC balance in the class on January 1, 2017 (line L), for taxation years ending between January 1, 2017 and December 31, 2026. This amount will be calculated each year when the client file is rolled forward.

The amount updated to this line will vary according to the CCA claimed. When rolling forward a client file, Taxprep will automatically add to the amount entered on the line in the initial client file, the lesser of:

1. the total of the CCA and the additional deduction calculated for the UCC balance on January 1, 2017, net of the CCA amount claimed with respect to this UCC balance in prior years; and
2. the CCA amount claimed on line 12 for the class.

When the CCA amount claimed on line 12 of the form is not nil and it is different from the maximum CCA that can be claimed by the business, verify if the amount updated is correct.

For taxation years ending before 2027, an additional deduction corresponding to 2% of the UCC in the class on January 1, 2017, can be claimed with respect to property of a business that has been acquired before January 1, 2017. This additional deduction is however reduced from any amount that has been deducted in prior taxation years and three times the total of the amounts deducted from the UCC because of the amounts received to which subsection 13(39) ITA applies.

Furthermore, if the total of that additional deduction and the eligible CCA for the year is less than $500, the additional deduction may be increased to allow a total CCA of $500, without exceeding the UCC in the class on January 1, 2017 (net of CCA deductions for prior years that started after January 1, 2017), or to ensure that the CCA in respect of the class for the year to be more than the UCC balance (before the application of such deduction).

Subsections 13(38) to (42) ITA provide for the transitional rules that apply as a result of the repealing of the eligible capital property rules and the addition of CCA class 14.1.

Subsection 13(38) ITA provides for the rules that apply where an eligible capital expenditure in respect of a business has been incurred before January 1, 2017.

Subsection 13(39) ITA sets forth the rules that apply where certain property that was eligible capital property before January 1, 2017, is disposed of on or after January 1, 2017.

Subsection 13(40) ITA prevents the use of subsection 13(39) ITA to “step-up” the UCC in the new class by means of a non-arm’s length transfer of property that was eligible capital property before January 1, 2017.

Subsection 13(39) ITA sets forth that the terms cumulative eligible capital, eligible capital expenditure, eligible capital property and exempt gains balance have the meanings that would be assigned to those expressions if the Act read as it did immediately before 201, for the purposes of subsections (38) to (40) and (42), paragraph 20(1)(hh.1), subsections 40(13) to (16) and paragraph 79(4)(b),

Subsection 13(42) of the Act provides rules consequential on the repeal of the eligible capital property rules where a taxpayer owns property included in Class 14.1 of Schedule II to the Income Tax Regulations in respect of a business at the beginning of January 1, 2017, that was an eligible capital property in respect of the business immediately before January 1, 2017.