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What is considered a capital asset for tax purposes?
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What is a capital property in Canada?
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Is the expense for a part of a property or for a separate asset? The cost of replacing a separate asset within a property is a capital expense. For example, the cost of buying a refrigerator to use in your rental operation is a capital expense.
- Eligible Capital Expenditures
The price you pay to buy eligible capital property is an...
- Eligible Capital Expenditures
- Note
- Eligible capital property
- Election to treat the disposition of an eligible capital property as a capital gain
- Replacement property
- Annual allowance
- Cumulative eligible capital (CEC) account
- How to calculate your annual allowance
- Forms and publications
As of January 1, 2017, you can no longer claim the allowance on eligible capital expenditures. Property that formerly would have been eligible capital property is now considered depreciable property under the capital cost allowance rate of Class 14.1.
Property that does not physically exist but gives you a lasting economic benefit is eligible capital property. The price you pay to buy eligible capital property is an eligible capital expenditure.
On this page:
•Eligible capital property
•Election to treat the disposition of an eligible capital property as a capital gain
•Replacement property
You may buy property that does not physically exist but gives you a lasting economic benefit. The CRA calls this kind of property eligible capital property.
Some examples are goodwill, franchises, concessions, or licences for an unlimited period.
Under certain conditions, you can elect to treat the disposition of an eligible capital property (other than goodwill) as a regular capital gain. For example, properties such as a franchise, concession, or licence that has an unlimited life may qualify for this election.
By electing, you deem to remove the property from your cumulative eligible capital (CEC) account for proceeds equal to its original cost.
You can then declare a capital gain equal to your actual proceeds of disposition minus the cost of acquisition.
Report the details on the "Real estate, depreciable property and other properties" line of Schedule 3, Capital Gains (or Losses).
This election will benefit you if you have unused capital losses to apply against the capital gain.
The election is available if you meet the following conditions:
If you sell an eligible capital property and replace it with another one for the same or similar use, you can choose to postpone all or part of any gain on the sale. You can postpone or defer adding a capital gain or recapture of capital cost allowance (CCA) to income.
You might sell a business property and replace it with a similar one, or your property might be stolen, destroyed, or expropriated and you replace it with a similar one. You can defer tax on the sale proceeds which you reinvest in replacement property within a reasonable period of time. To defer reporting the capital gain or recapture of CCA, you must acquire and you, or a person related to you, must use the new property for the same or similar purpose as the one that you are replacing.
This happens if you acquire a replacement eligible capital property within a certain period of time. To do this, you have to replace the property no later than one year after the end of the tax year in which you sell the original property.
You can also defer a capital gain or recapture of CCA when you transfer property to a corporation or a partnership.
You cannot fully deduct an eligible capital expenditure because the expenditure is considered to be capital in nature and provides a lasting economic benefit. However, you can deduct part of its cost each year. The CRA calls the amount you can deduct your annual allowance.
This is the bookkeeping record you establish to determine your annual allowance. You also use your CEC account to keep track of the property you buy and sell. The CRA calls the property in your CEC account your eligible capital property. You base your annual allowance on the balance in your CEC account at the end of your fiscal period.
Keep a separate account for each business, but include all eligible capital property for the one business in the same CEC account.
Calculating your annual allowance and CEC account balance at the end of your fiscal period
Balance in the account at the start of your fiscal period $ Blank space for dollar value Line 1 Eligible capital expenditures you made or incurred in your fiscal period $ Blank space for dollar value × 75% $ Blank space for dollar value Line 2 Line 1 plus line 2 $ Blank space for dollar value Line 3 All the amounts you received or are entitled to receive from the sale of eligible capital property in your fiscal period $ Blank space for dollar value Line 4 All the amounts that became receivable in your fiscal period from the sale of eligible capital properties before June 18, 1987 $ Blank space for dollar value Line 5 Line 4 plus line 5 $ Blank space for dollar value Line 6 Line 6 × 75% $ Blank space for dollar value Line 7 CEC account balance (Line 3 minus line 7) $ Blank space for dollar value Line 8 Annual allowance (7% × line 8) $ Blank space for dollar value Line 9 CEC account balance at the end of your fiscal period (Line 8 minus line 9) $ Blank space for dollar value Line 10
Note
An eligible capital expenditure is reduced by the amount of any assistance received or receivable from a government for the expenditure. Also, an amount forgiven (or entitled to be forgiven) on government debt reduces your CEC account. Special conditions may apply to non-arm's length transactions. For more information, go to Interpretation Bulletin IT-123, Transactions Involving Eligible Capital Property. You can deduct an annual allowance if there is a positive balance (line 8) in your CEC account at the end of your fiscal period. You do not have to claim the full amount of the maximum annual allowance for a given year. You can deduct any amount you want, up to the maximum allowable of 7%. If your fiscal period is less than 365 days (366 days if a leap year), you have to prorate your claim. Base your claim on the number of days in your fiscal period compared to 365 days (366 days if a leap year). If there is a negative balance in your CEC account, go to Sale of eligible capital property. The following is an example of how to calculate the maximum annual allowance and account balance.
Example
John started a business on January 1, 2017. John's business has a December 31 year-end. During 2017, he bought a franchise for $16,000. He calculates his maximum annual allowance of $840 for 2017 as follows: John's CEC account Balance at the start of John's 2017 fiscal period $0 Line 1 John's eligible capital expenditure: franchise cost for the 2017 fiscal period: $16,000 × 75% $12,000 Line 2 Line 1 plus line 2 $12,000 Line 3 John has not sold any eligible capital property during the 2017 fiscal period. Therefore, he will not have any amounts on lines 4 to 8. John's maximum annual allowance on eligible capital property is 7% × line 3 $840 Line 9 Balance at the end of 2017 (line 3 minus line 9) $11,160 Line 10
•Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income
•Guide T4037, Capital Gains
•Form T2125, Statement of Business or Professional Activities
•Income Tax Folio S3-F3-C1, Replacement Property
To calculate capital cost allowance (CCA) on your depreciable properties, use the form that applies to your business: Form T2125, Statement of Business or Professional Activities. Form T2042, Statement of Farming Activities. Form T2121, Statement of Fishing Activities.
Oct 6, 2022 · Capital property is any property that can create capital gains or losses when you dispose of it. This includes depreciable property used to earn income and the eligible capital property. According to the Canada Revenue Agency, common examples include land, buildings, shares, bonds, funds, trust units, eligible properties, and personal properties.
Feb 5, 2024 · Capital assets are defined differently when viewed from a tax perspective. For tax purposes, a capital asset is all property held by a taxpayer, with the exceptions of inventory and accounts receivable. Examples of Capital Assets
An expense deemed as a separate asset would be considered a capital expenditure. For example, a machine bought and installed in a factory would be considered a separate asset, while replacing the rudder of a ship would be considered an integral part of the ship, and a current expenditure.
Sep 21, 2023 · Capital assets (also often called Property, plant and equipment in Canada) are long-term assets that are critical for business operations. These assets are typically expensive (over $500) and have a useful life of more than one year. Examples of capital assets include buildings, equipment, and vehicles.
