Finance is reviewing the interaction of the Class 14.1 transitional, and s. 85(1) rollover, rules

An individual transfers a directly-held pharmacy business to a wholly-owned Newco in 2017. On January 1, 2017, the cumulative eligible capital (CEC) account of $1.5 million, reflecting a previous purchase price for goodwill of $2 million, was transferred to Class 14.1 resulting in an undepreciated capital cost (UCC) balance of $1.5 million. The FMV of the goodwill at the time of the drop-down in 2017 is $2.2 million. The s. 85(1) elected amount is $1.5 million to avoid recapture. However, the shares received by the individual in exchange therefor would have a cost only of $1.5 million, whereas if the drop-down had occurred in 2016, it could still have occurred on a rollover basis with an elected amount of $2.0 million (i.e., 4/3 of the CEC balance), thereby giving rise to a cost of the same shares to the individual of $2 million.

After discussing the general policy behind the Class 14.1 transitional rules, Finance commented on this $500,000 cost discrepancy:

Subsections 13(38) and (39) and their interaction with other rules, including subsection 85(1), are the subject of a review by the Department of Finance Canada in order to ensure that the tax consequences of a rollover under subsection 85(1) are appropriate for the transferor and the transferee of property.

Neal Armstrong. Summary of 5 October 2018 Financial Strategies and Instruments Roundtable, Q.6 under s. 13(38).