The federal government's 2014 Budget contained a host of
changes, including "proposals" to change the taxation of
eligible capital property (i.e., goodwill, patents, trademarks,
intellectual property, etc.) so that it will be taxed in the same
way that gains on other depreciable capital property (e.g.
equipment, commercial vehicles, etc.) are taxed. While changes to
the eligible capital property ("ECP") regime seem logical
and innocuous at first glance, if implemented these changes will
lead to approximately a 10% increase in the corporate tax payable
on such gains, or in other words a roughly 45% increase over the
current corporate tax payable on such sales. These changes
should cause owner-managers who may be considering selling their
businesses, to start thinking about selling a lot more
To better understand the impact of the tax changes, assume that an
individual named Ely has been carrying on a hat business through a
corporation named Ely's Caps Limited ("Ely Cap" for
short). Ely was considering getting out of the business in
the next few years but when he was made aware of the proposed
changes to the ECP rules, he immediately began to explore his
options. While Ely was primarily interested in selling his
shares in Ely Cap, he was unsuccessful in finding a purchaser who
would buy them. He has, however, received an offer to buy all
of Ely Cap's goodwill for $10,000,000.
Under the current ECP regime, if Ely Cap accepts the offer, the
sale would give rise to $5,000,000 of taxable income.
Assuming this income will all be subject to the general corporate
tax rates on active business income in Ontario, about $1,325,000 of
tax will be payable by the corporation. In addition, after
the end of Ely Cap's current taxation year, the sale will give
rise to a $5,000,000 addition to Ely Cap's capital dividend
account ("CDA"), which will allow Ely to remove
$5,000,000 of cash from Ely Cap with no additional tax.
Under the proposed new ECP regime, we understand that the full
$10,000,000 of proceeds would be taxed at corporate capital gains
tax rates, which would give rise to a corporate tax liability in
Ontario of slightly more than $2,300,000. As was the case
under the current ECP regime, this sale will still generate a CDA
in Ely Cap of $5,000,000, which could be distributed to Ely tax
Assuming Ely is happy/able to live off the $5,000,000 of CDA, and
is willing to leave the other remaining after-tax proceeds in Ely
Cap, the result of the change from the current ECP regime to the
new one is that Ely Cap will have $1,000,000 less in
The "cost" of the additional tax should not be
understated since, as a practical matter, most owners in Ely's
situation and in situations involving more modest sales than
Ely's may not draw more than the CDA balance out of Ely Cap for
a very long time if ever. So, in many cases the
higher tax cost under the new ECP regime will really amount to an
effective additional 10% tax on Ely Cap, which, as mentioned above,
is nearly 45% more tax than Ely Cap would have paid under the
current ECP regime.
Ely ultimately decided to sell Ely Cap's goodwill. Being
the philanthropic person he is, Ely decided to cause Ely Cap to
create an endowment by donating all of the tax
"savings". As it turns out, even with the $1,000,000
corporate donation, Ely Cap would be left with more
after-corporate-tax dollars then if the sale of goodwill had been
completed after the new ECP regime became law, and no
donation was made. (The Jewish Foundation would be
happy to assist in implementing a charitable plan similar to
Assuming the new ECP regime becomes law, it would certainly appear
that this new and previously unannounced 10% tax will likely be a
significant revenue generator for the Canada Revenue Agency given
the massive transition of wealth that is set to occur over the next
number of years. Of course the proposals are not yet law and
some practitioners might take comfort that the proposals have been
put forward as a "consultation" process. That process may
mean the new regime may not be law for some time, but based on the
results of prior "consultation" processes and the
streamlined approach to legislation generally taken by the current
government, it seems that business owners should view the 2014
Budget announcement as fair notice that the new ECP regime will
more than likely be enacted in the manner proposed -
without grandfathering. Business owners who
were already thinking about selling would be advised to carefully
reconsider the timing of their exit because now may be a very good
time to sell.
Originally published in the November issue of
Giving Advice, a publication from the Professional
Advisory Committee (PAC) of the Jewish Foundation of Greater
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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