Changes to the Eligible Capital Property Regime and their Impact on Farming Business

September 29, 2016

The 2016 federal budget moved forward significant changes to the eligible capital property (ECP) regime first announced in 2014. Changes will become effective on January 1, 2017 which may significantly increase tax payable by a private company on the sale of ECP assets for a gain. This is due to the fact that ECP will be included in the capital cost allowance (CCA) system onJanuary 1, 2017.

ECP includes farm quotas, goodwill and other intangibles without a fixed lifespan. For the remainder of this article we will refer to quota.

When quota is sold under the current rules, there may be recapture of previously claimed tax depreciation (known as CEC deductions) as well as an additional income inclusion related to the gain, which is the sale proceeds in excess of the original cost. Currently any gain is taxed as active business income at a 50% inclusion rate. For Canadian controlled private corporations (CCPCs), the federal tax rate on such income is 15%, or 10.5% if it is eligible for the small business deduction. When quota is sold under the proposed rules, any capital gain will be taxed at a much higher federal investment income tax rate of 38.67%, where a portion is refundable only after a taxable dividend is paid by the company. This means that the deferral of tax that is available under the current rules when funds are retained in the corporation will be lost. The result is an immediate increase in federal income tax payable in the year of disposition of approximately 11.84% of the gross gain (or 14.09% for income subject to the small business tax rate). If the small business tax rate is applicable, then there will also be a provincial tax rate differential.

There will also be changes to the rules related to the deductions available after January 1, 2017 for purchased quota.

Unlike corporations, the impact of the changes on individuals will be far less significant. The most important point to keep in mind is that qualified farm property such as quota will continue to be eligible for the capital gain exemption. However, as a capital gain, the alternative minimum tax rules may come into play once the new rules come into force.

For the remainder of the 2016 calendar year there are some planning opportunities available:

  • If your farm business is planning to purchase quota with a substantial value, consider making the acquisition before the end of 2016. Acquisitions made in 2016 will not be subject to the half year rule under the CCA system and the deduction available in the year of acquisition will be higher than it would be if the acquisition is made in 2017.
  • Owner managers of a CCPC planning to sell quota should consider completing the sale before January 1, 2017. Doing so can greatly decrease tax payable by the company on an immediate basis.
  • If you are in a situation where no external sale is currently contemplated, your company has large accrued gains on quota, and you have or foresee personal cash needs in the near future, you may want to consider whether it makes sense to undertake a corporate reorganization or a non-arm’s length transaction to crystallize the gain before the end of 2016.
  • If part of your transition or exit plan may include transferring your quota to a corporation or partnership, you should consider doing so before 2017, as there is more flexibility under the 2016 rules.

As the proposed changes take effect on January 1, 2017, now is a good time to consider any tax planning that may be beneficial for your business. Your BDO advisor is ready to help and can assist you in assessing the costs and benefits of undertaking any tax planning that may be beneficial in your particular situation.

To learn more, please contact your local BDO office or:

Coralee Foster
National Agriculture Leader
519 348 8412

Bruce Ball
Partner, National Tax
416 369 3096

About BDO
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BDO’s dedicated team of professionals works with producers, agribusiness owners, farm organizations, and co-operatives, offering a full range of assurance, tax, business transition, and other services to help them succeed. As farms evolve and leverage new methods to streamline their operations, cut costs, and increase production, our professionals are ready to advise on how to maximize these investments for success.

The information in this publication is current as of July 31, 2016.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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