In the 2016 federal budget, the Liberals announced a new program for how intangible assets will be treated for tax purposes, beginning Jan. 1, 2017.
This could put an added tax burden on your business, so you may want to consider actions before the end of this tax year to mitigate the impact.
Intangible assets are part of “eligible capital expenditures” or “eligible capital property,” and they include goodwill, customer lists, trademarks, franchise rights, farm quotas and some patents. They may also include certain expenses incurred through incorporation, reorganization or amalgamation.
Under the new regime, the Canada Revenue Agency will repeal the current tax treatment of intangible assets and replace it with a new capital cost allowance (CCA) class, and provide rules to transfer taxpayers’ existing cumulative eligible capital (CEC) pools to the new CCA class.
This new CCA class (class 14.1) will work like the current ones that allow you to claim tax depreciation for tangible assets used in your business or in your professional activities, such as a building, furniture or equipment.
The method for deducting your costs will change from a seven per cent deduction of a declining value to a CCA method like other depreciable assets. The new rate on intangibles will be 5%. The changes will make the system easier to administer (once we migrate through a transition period), but it will have implications, especially as it relates to the sale of intangible assets.
At present, the proceeds from the sale of intangible assets can be taxed as business income with an inclusion rate of 50 per cent. If we assume a combined Federal and Ontario corporate income tax rate of 26.5 per cent, the effective tax rate is 13.25 per cent.
But with the changes that will become effective Jan. 1, The tax rate will increase to just over 25% per cent, because the gain on sale of intangible assets will be treated as property income rather than business income.
So if you have plans to sell intangible assets such as trademarks, patents or a business with goodwill in the next year, it is advantageous from a tax perspective to trigger the gain in 2016.
Even if you don’t plan to sell, it’s worth having a conversation with a tax professional about what other steps you can still take to mitigate the impact on your business before the end of this year. This could include an internal reorganization to trigger a gain in 2016.