Canadian Eligible Capital Deduction Pool Accounting

by Darjen
(Ontario, Canada)

How do you make the 25% non-deductible portion of an intangible asset purchase disappear without expensing it so it is shown on the balance sheet and tracked?

I.E. The corporation buys a URL for $2,000.00 (now intangible tucows v renner Ontario). However only 75% is put in the CEPD pool on schedule 10 of the T2. Where do you put the other 25%?

It can't be expensed. If recorded as any form of liability then it is eventually still expensed ... or callable debt instead of ...? How do you show shareholders you spent $2000 but only $1500 counts towards assets?

Hey Darjen,

I don't really give tax preparation assistance on this site. This is a site about bookkeeping for small business owners who work from home.

Having said that, I'm not really up on the cumulative eligible capital deduction on Schedule 10 ... but without doing any kind of research, I'd say you are confusing financial reporting and tax reporting.

I did a post a while back on CCA and deferred tax (see the link above) where I chatted about the difference between financial reporting and tax reporting.

I'm fairly certain your tax return software will handle the 75/25 allocation which is totally separate from the bookkeeping entry in your accounting software.

If you think about your financial statements, meals and enterainment are only 50% deductible on your tax return but you record 100% of the expense in your accounting records.

Please don't take my word on this. Follow up with your accountant to be sure.

P.S. I would like to remind you there is a difference between information and advice. The general information provided in this post or on my site should not be construed as advice. You should not act or rely on this information without engaging professional advice specific to your situation prior to using this site content for any reason whatsoever.

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May 06, 2012

Small guys take on ECD too!
by: Anonymous

Yes this IS a bookkeeping question and really has nothing to do with the taxes.

The facts are that now we have to deal with intangible assets and the entry of these items are the question.

In a normal asset situation a fixed asset is recorded as original cost in one account and then depreciation or amortization is tracked in a separate or paired account. Placing these accounts as children under a parent asset account creating the necessary information for both record keeping balance sheet info and carry forward amounts of available depreciation and current net value for the balance sheet for any individual asset. The amounts are all at actual value and depreciation can be had at full face value over the years on each individual asset on an item by item basis.

The "ECPD Pool" is a completely different animal and the question relate to how to set up the accounts or the bookkeeping for these items.

Where an asset is purchased and recorded in that year at X face value. Only at tax prep time in schedule 10 of T2 then the value of that asset now joins a pool with all other non tangibles at only 75% of its purchase value and that is the last time its thought of a a separate item until it may be sold. That balance sheet pool value carries forward to next year.

The other 25% cannot be deducted or expensed. So how would one create accounts and record such transactions in order to keep the "Pool" value in line with CRA reporting and yet not add value to the balance sheet via the other 25% either by retained asset value or creation of a neutralizing liability which again creates a deduction?

May 08, 2012

Intermediate Accounting
by: Lake

I don't know what to tell you. I treat intangible assets in the same fashion as tangible assets.

Nelson and Conrod's Intermediate Accounting 7th Canadian Edition Volume I says:

"Intangible capital assets are those assets that lack physical substance ... These assets are reported as a separate element in the balance sheet. Major items should be listed separately and recorded at cost. The accumulated amortization should be disclosed in the notes or elsewhere in the financial statements. By convention, the contra account accumulated amortization is seldom listed separately and the asset is shown net of the contra account."

In another section of the same text book, it states the basic principles of accounting for intangible assets:

"Accounting for intangible assets involves ...:

1. At acquisition, application of the cost principle.
2. During the period of use, application of the matching principle.
3. At disposition, application of the revenue principle.

... Section 3060, paragraphs .31 and .32 of the CICA Handbook ... provides the following guidelines:

Amortization should be recognized in a rational and systematic manner appropriate to the nature of a captial asset with a limited life and its use by the enterprise.

When the useful life of a capital asset other than land is expected to exceed 40 years, but cannot be estimated and clearly demonstrated, the amortization period should be limited to 40 years."

I understand ECC to be a tax account (and therefore a tax issue) where three quarters of the costs are written off on a 7% declining balance. If your situation is different, then I'm sorry I don't have the expertise to assist you and suggest you speak with your accountant regarding your options and appropriate bookkeeping entries.

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