34 How are goodwill and intangibles depreciated for tax purposes?
Lewis Lam
Intangible assets are largely broken into two separate classes for CCA purposes as follows:
Intangible assets with a limited useful life (like most patents and franchises) are put into class 14 and depreciated on a straight-line basis over their estimated useful life. Class 14 assets are subject to the new Accelerated Investment Incentive (“AII”) rules and claim an additional 50% CCA in the year of purchase (with 50% less CCA in the final year of its useful life).
Intangible assets with an unlimited (or unknown) useful life (Goodwill, customer lists etc) are put into class 14.1 and depreciated using the declining balance method at 5% per year.
Class 14.1 is a relatively new CCA class resulting from significant changes to the depreciation rules for Eligible Capital Property (“ECP”) which were implemented on January 1, 2017. Class 14.1 assets are subject to the new AII rules (i.e. no half-year rule and an additional 50% CCA can be claimed in the first year).
Let’s look at how CCA would be calculated in class 14 vs class 14.1 under the new AII rules:
|
Class 14 (straight line) |
CCA |
Class 14.1 (declining balance) |
CCA |
|
Purchased a patent for $200,000 with an estimated 5 year useful life |
|
Purchased Goodwill for $200,000 with an unknown useful life |
|
|
Year 1 – $200,000 / 5 years. $40,000 annual CCA * 1.5 in year 1 due to AII |
$60,000 |
Year 1 – $200,000 * 1.5 AII * 5% CCA rate |
$15,000 |
|
Year 2 – Annual CCA of $40,000 |
$40,000 |
Year 2 – $185,000 UCC * 5% CCA rate |
$9,250 |
|
Year 3 – Annual CCA of $40,000 |
$40,000 |
Year 3 – $175,750 UCC * 5% CCA rate |
$8,787 |
|
Year 4 – Annual CCA of $40,000 |
$40,000 |
Year 4 – $166,963 UCC * 5% CCA rate |
$8,348 |
|
Year 5- Annual CCA of $40,000 * 50% to reflect AII rule in final year |
$20,000 |
Year 5 – $158,615 UCC * 5% CCA rate |
$7,931 |
The example is used to illustrate the different CCA mechanism under class 14 (straight line) and class 14.1 (declining balance) intangible assets. Note that the depreciation of the class 14 is dramatically higher in the above example largely because of its shorter useful life.
Interactive content (Author: Mariah Cawkell, January 2020)
Interactive content (Author: Zaynab Rashid, January 2020)
Reference and Resources:
- FITAC -Personal Tax Guide Planner 2019-2020
- FITAC – Commentary “CCA – General Rules”
January 2020
