Goodwill sold in an asset deal is depreciable property, taxed in two pieces. Every dollar of capital cost allowance the seller claimed returns as ordinary income under Income Tax Act subsection 13(1); only the excess over original cost is a capital gain, half taxable under section 38(a). The buyer adds the whole price to Class 14.1 and deducts 5 per cent a year.
Key takeaways
SECTION 01 OF 09
A sale runs through ordinary depreciable-property machinery. The class balance falls first, by element F of the undepreciated capital cost definition in subsection 13(21) — the lesser of net proceeds and “the capital cost to the taxpayer of the property”. Proceeds above cost never touch the pool. If that drives the balance below zero, subsection 13(1), marginal note Recaptured depreciation, provides that “the excess shall be included in computing the taxpayer’s income of the year” — at full rates, as Treadstone Law says of recapture on business assets. Only then comes the second number: the excess over cost is a capital gain, half taxable under section 38(a).
An example, on parameters I chose rather than data. Goodwill bought in 2017 for $400,000, no pre-2017 pool, sold in 2026 for $700,000. Nine claims at 5 per cent declining balance, the first halved, total $141,266 and leave undepreciated capital cost of $258,734. The pool falls by $400,000 to negative $141,266, all recaptured as income; the $300,000 above cost is a capital gain, $150,000 taxable. Half the taxable amount is recapture, so a vendor pricing at a capital-gains rate is wrong in the expensive direction.
SECTION 02 OF 09
Schedule II to the Income Tax Regulations defines the class as property that “(a) is goodwill; (b) was eligible capital property of the taxpayer immediately before January 1, 2017” and is still owned, or was acquired after 2016 and escapes eight exclusions — tangible property, anything otherwise deductible, trust and partnership interests, shares and similar property.
That is why a share purchase produces no Class 14.1 entry. Subsection 13(36) says the same from the other side: nothing enters the class if paid “in consideration for the purchase of shares”. In a share deal the class stays inside the target, undisturbed — part of why vendors prefer shares and buyers prefer assets, and Treadstone Law on goodwill tax treatment agrees goodwill is then never separately identified, only embedded in the price. The class is per business too: regulation 1101(1) prescribes one for each.
SECTION 03 OF 09
Subsection 13(34) opens with a deeming rule few owners expect: where a taxpayer carries on a business, “there is deemed to be a single goodwill property in respect of the particular business”. Finance put it plainly in Budget 2016 — “Every business will be considered to have goodwill associated with it, even if there had not been an expenditure to acquire goodwill.”
That notional property is the account for capital amounts with no asset attached. Subsection 13(35) deems a capital outlay that is neither a property’s cost nor otherwise deductible to be an acquisition of goodwill at that cost. Subsection 13(37) mirrors it: a capital receipt that is not income, not a cost reduction and not part of a capital gain deems the taxpayer “to dispose, at that time, of goodwill in respect of the business” — so a settlement with no asset behind it can produce recapture with nothing sold.
SECTION 04 OF 09
Before then goodwill sat outside the CCA system. Finance set out the old arithmetic in Budget 2016: “Under the ECP regime, 75 per cent of an eligible capital expenditure is added to the CEC pool in respect of the business and is deductible at a rate of 7 per cent per year on a declining-balance basis.” A disposition reversed that, and “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.”
Read that clause carefully, because it is the whole point. The rate on an ECP gain was already one-half; repeal did not raise it. What changed is the character of the included half: business income then, a taxable capital gain now. The reform, Finance said, would produce “the elimination of a tax deferral opportunity that arises from the treatment of gains on the sale of ECP as active business income”. One caution: the explanatory notes predate enactment and number the transitional balance rule 13(37); the Act uses 13(37) for receipts and 13(38) for the balance.
SECTION 05 OF 09
For a CCPC the difference is money, not vocabulary. The small business deduction in section 125 is computed on “the amount of income of the corporation for the year from an active business carried on in Canada”. A taxable capital gain is not that, so the goodwill gain no longer draws on the business limit or gets its rate. It runs the other way: the gain falls inside aggregate investment income under subsection 129(4), and section 123.3 adds to Part I tax “an amount equal to 10 2/3% of the lesser of” that income and taxable income above the small-business amounts. It is refundable as taxable dividends are paid, so the cost is deferral.
One thing did not get worse: the non-taxable half still feeds the capital dividend account under subsection 89(1) and can be paid out tax-free, as Treadstone Law on the CDA sets out. Recapture generates none. Nor does the lifetime capital gains exemption reach an asset sale: subsection 110.6(2.1) needs a disposition of what “was a qualified small business corporation share of the individual”. See the 24-month rule, and Treadstone Law on double taxation.
SECTION 06 OF 09
The deduction comes from paragraph 20(1)(a), marginal note Capital cost of property, allowing such part of a property’s capital cost “as is allowed by regulation”. The regulation is subparagraph 1100(1)(a)(xii.1) — “of Class 14.1, 5 per cent” of the undepreciated capital cost of the class.
Five is lower than the old seven, but not a tightening: the full cost now enters the class, not three-quarters of it. CRA’s guide T4002 states the effect — post-2016 property enters “at a 100% inclusion rate with a 5% CCA rate on a declining-balance basis and the existing CCA rules will normally apply.” The half-year rule is one of those, carried by regulation 1100(2): a buyer paying $700,000 claims 5 per cent of $350,000 in year one, and still holds over half the cost a decade later.
SECTION 07 OF 09
Pools carried in from the old regime were not re-rated. Paragraph 1100(1)(c.1), headed Additional Allowances — Class 14.1, allows a further claim “for a taxation year that ends before 2027” of up to 2 per cent of the opening 2017 balance. Five plus two is the old seven. A 2026 deal therefore catches the last year of that rate, while a buyer acquiring goodwill now gets 5 per cent from the start: the higher rate attaches to expenditures incurred before 2017, not to the class.
Disposing of pre-2017 eligible capital property also fails to reduce the class by the full lesser-of amount. Subsection 13(39) deems that taxpayer to have acquired a property of the class immediately beforehand at a cost of up to “1/4 of the proceeds of disposition of the particular property”, and the quarter added back cancels a quarter of the reduction. CRA states the result plainly: “If you dispose of Class 14.1 property and that property was eligible capital property before January 1, 2017, include only 75% of the lesser of the proceeds of disposition and the capital cost of the property.”
That preserves the old outcome, since under ECP only 75 per cent of a receipt reduced the pool. Goodwill with no pre-2017 history has nothing to add back: those amounts come from the opening balance in subsection 13(38), which applies only where an eligible capital expenditure was incurred before 2017.
SECTION 08 OF 09
When a class empties for less than its balance, subsection 20(16), marginal note Terminal loss, normally deducts the shortfall provided “the taxpayer no longer owns any property of that class”. Class 14.1 is carved out. Paragraph 20(16.1)(c) switches the terminal loss off “in respect of a taxation year in respect of property included in Class 14.1 of Schedule II to the Income Tax Regulations unless the taxpayer has ceased to carry on the business to which the class relates”.
So the loss goes to a vendor who sells the whole business and stops, and is denied to one who sells a division, a customer list or a location and carries on. On a partial sale the buyer depreciates a fresh capital cost while the seller holds a stranded balance until it exits.
SECTION 09 OF 09
Goodwill is a residual, so it is the line most exposed to the allocation fight. CRA tells buyers to “attribute to goodwill the balance of the purchase price that remains after you attribute the FMV to each asset and to inventory”, in an example where $480,000 buys $440,000 of identifiable assets and $40,000 of goodwill. Treadstone Law covers allocating the price and the goodwill-versus-equipment split; the mechanics are in how the price gets allocated and the section 22 election.
Two boundaries. Class 14.1 is income tax only — CRA notes that “Property in Class 14.1 is excluded from the definition of capital property for GST/HST purposes”, so nothing here decides sales tax; see the GST/HST election. And subsection 13(39) stands down where subsection 85(1) and other rollovers apply, one reason the section 85 rollover is worth pricing before closing. Related: the non-compete allocation.
For a professional practice the harder question is whether the goodwill transfers at all. Treadstone Law separates personal from practice goodwill — referrals that leave with the professional, against location, staff and systems that survive — and only the second reliably supports the price; see share restrictions on a practice. Its answer on valuing and taxing goodwill still frames the buyer’s side under the repealed cumulative eligible capital rules; since 2017 it is Class 14.1.
No. Class 14.1 exists inside the corporation being sold, not in the shareholder’s hands, so a share sale produces no Class 14.1 entry at all — goodwill stays embedded in the price and is never separately identified or taxed on a goodwill line.
Five per cent a year on a declining-balance basis, applied to the whole price paid for goodwill — not the old seven per cent applied to only 75 per cent of the expenditure that applied under the pre-2017 eligible capital property regime.
No. A terminal loss on Class 14.1 is denied unless the taxpayer has ceased to carry on the business the class relates to, so a vendor who sells a division or a location while continuing to operate is left holding a stranded balance until it eventually exits.
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