Blog: Sale of Goodwill – Changes to the Tax Laws


The 2016 Federal budget proposed to repeal the eligible capital property (ECP) regime, replacing it with a new capital cost allowance (CCA) class available to businesses, starting January 1, 2017.

Existing Rules

An eligible capital expenditure is generally a capital expenditure incurred to acquire rights or benefits of an intangible nature for the purpose of earning income from a business. Eligible capital expenditures include the cost of goodwill when a business is purchased. They also include the cost of certain intangible property such as customer lists and licenses, franchise rights and farm quotas of indefinite duration. Under the ECP regime, 75 per cent of an eligible capital expenditure is added to the cumulative eligible capital (CEC) pool in respect of the business and is deductible at a rate of 7 per cent per year on a declining-balance basis.

When ECP is sold, the existing rules provide that 75 per cent of the proceeds is first applied to reduce the CEC pool and then results in the recapture of any CEC previously deducted. Once all of the previously deducted CEC has been recaptured, any excess receipt (an ECP gain) is included in income from the business at a 50-per-cent inclusion rate, which is also the inclusion rate that applies to capital gains.

New Rules

Under the new rules, a new class of depreciable property for CCA purposes will be introduced. Expenditures that are currently added to CEC (at a 75-per-cent inclusion rate) will be included in the new CCA class at a 100-per-cent inclusion rate. Because of this increased expenditure recognition, the new class will have a 5-per-cent annual depreciation rate (instead of 7 per cent of 75 per cent of eligible capital expenditures). To retain the simplification objective, the existing CCA rules will generally apply, including rules relating to recapture, capital gains and depreciation.

Sale of Goodwill and other ECP

The proposed changes will have a significant tax impact on sale of businesses where sale of goodwill or other ECP is involved.

Under both, the existing and the new rules, when goodwill is sold, one half of the gain is tax free, which for Canadian controlled private corporations (CCPC) is added to the capital dividend account and can be distributed tax free to Canadian residents shareholders.

The taxable portion of the gain is currently taxed as active income, allowing the advantage of a tax deferral available to businesses earning active income through corporations, while under the new rules, the taxable portion of the gain will be taxed as taxable capital gain, losing the tax deferral opportunity.


Assume sale of business with goodwill having a fair market value of $1,000,000 by a CCPC (both corporation and individual shareholder are residents of Quebec). The difference between the current and the new regimes can be illustrated as follows:

Corporate level 2016 After 2016
Sale of goodwill



Taxable portion






Corporate tax (Quebec)



Net after tax – Corporate level




Distributions to individual shareholder

Available for distribution 865,500 747,165
Refundable tax recovered 153,333
865,500 900,498
Tax free capital dividend 500,000 500,000
Taxable dividend 365,500 (3) 400,498 (4)
Personal taxes 145,799 (5) 175,578 (5)
Total combined taxes 280,299 275,080
Net after tax – Personal level 719,701 724,920

assuming the small business deduction was used for income from operations
(2) includes Refundable Portion of Part I tax of 30.67% ($153,333)
(3) of the $365,500, $360,000 (72%*$500,000) will be designated as eligible dividend
(4) dividend other than eligible
(5) assuming top marginal rate

As demonstrated above, in the event of a sale of goodwill, the corporate tax rates after 2016 will be significantly higher than the rates in the current regime. The corporate income taxes after 2016 will increased by approximately 24% with respect to the taxable portion of the gain. Although the increased taxes will be recovered when taxable dividends are paid out to the individual shareholders, as previously indicated, corporations will lose the tax deferral advantage when leaving the proceeds in the corporation.

Corporations who are planning a sale of a business in the near future should ensure that the sale is complete before the end of 2016, in order to benefit from the tax deferral opportunity under the current regime.

In certain cases, when a sale of a business is not contemplated, considerations should be given to an internal reorganization, which includes a disposition of goodwill at fair market value in 2016, under the current regime. Although it would result in an immediate corporate tax at a rate up to 26.9% of the gain, it will allow distribution of the non-taxable portion of the gain tax free (capital dividend).

Should you require any assistance with respect to these matters, please contact your Crowe BGK advisor.

About the Author:

Ofer Tamir, CPA, CA, is a Tax Manager at Crowe BGK.

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