Friday’s draft legislation fixes gaps in the ECP transitional rules

Lorne Richter pointed out two problems with the 2016 Budget rules for the transition from eligible capital property to Class 14.1 depreciable property. The transitional rule in draft s. 13(37)(d) generally permits a corporation that has disposed of ECP in calendar 2016 but during a taxation that ends in 2017 to elect to have a s. 14(1)(b) inclusion rather than realizing a taxable capital gain.

The first problem now fixed in the draft legislation which was released on Friday is that there will now be a CDA addition (in the case of a CCPC) for an income inclusion under s. 13(37)(d).

The second problem was that the election was not available if the taxpayer no longer is carrying on the business on January 1, 2017 (so that the election would not be available for goodwill proceeds received on a 2016 sale in the straddling year). This also has been addressed in the draft legislation by dropping a requirement that the business be carried on on January 1, 2017 (although there still is a requirement that the "taxpayer has incurred an eligible capital expenditure in respect of [the] business before January 2017," which could be problematic for goodwill which has not been purchased).

Lorne Richter, "ECP Transitional Rules and 2016 Asset Sales," Canadian Tax Highlights, Vol. 24, No. 7, July 2016, p. 12 under s. 13(37)(d).