Selling Business Equipment in Canada: Recapture and Terminal Loss

Is the money from selling a business laptop, tools or truck income?

Usually not as ordinary sales. A sale of business equipment runs through its capital cost allowance (CCA) class: the sale price comes off the class's remaining balance, called undepreciated capital cost (UCC). Income or a deduction appears only when that balance goes below zero or the class is emptied, and a capital gain only when the price is above cost (CRA Guide T4002, chapter 4).

A case is not simple when the business is closing, a corporation owns the asset, the item is a car, the price is above cost, or nobody can say what the class balance is. The balance depends on every earlier CCA schedule, so the sale cannot be reported correctly without it. Gather the purchase invoice, the latest CCA schedule, the sale price and selling costs, the buyer and the date.

What counts as the sale price when I sell a business asset?

The amount that comes off the class is the sale price minus the costs of making the sale, but never more than the asset's capital cost to you, which can be lower than the price paid, for example after government assistance or an investment tax credit (Income Tax Act, subsections 13(21) and 13(7.1); CRA Guide T4002). Anything above cost is a capital gain.

Insurance and other compensation for an asset that is destroyed, unlawfully taken or taken under statutory authority count as sale price too (Income Tax Act, subsection 13(21)). A sale to someone you do not deal with at arm's length, such as a relative, for less than the asset's value is generally treated as made at fair market value, what the asset would sell for between unrelated parties (Income Tax Act, section 69). The exception is a transfer to your spouse or common-law partner when you are both resident in Canada: it rolls over by default, with proceeds equal to the item's share of the class balance, so no recapture or gain arises unless you elect out in your return for that year (Income Tax Act, section 73). Charging GST/HST on the sale is a separate question: see GST/HST on used equipment.

Does selling one item trigger recapture or a terminal loss?

Not by itself. The result is figured for the whole CCA class, not the single item. Recapture needs the class balance to go below zero, and a terminal loss needs the sale to leave no property in the class while a balance remains (CRA Guide T4002; CRA Folio S3-F4-C1). Selling one of several computers in the same class usually just lowers the balance that later CCA is figured on.

Items written off quickly behave differently. Tools costing less than $500 each are generally Class 12, which has a 100% rate (CRA classes). If the class balance is zero because the cost was fully claimed, the whole sale price, up to cost, is recapture. Computers bought recently may qualify for a 100% first-year write-off. If nothing else is in the class, the balance is zero and selling one is recapture of the sale price up to cost; older computers in the same class keep the balance positive.

The class math assumes the asset was set up in a CCA class. If you deducted the whole cost as an ordinary expense, or never claimed CCA, confirm how the cost was first claimed before you report the sale.

Classes and the choice between expense and asset are covered in capital cost allowance and expense or CCA for laptops, phones and tools.

What is CCA recapture, and how is it taxed?

Recapture takes back CCA deducted earlier that the sale shows was more than the asset lost in value. It arises when the sale price is more than the class balance at the start of the year plus the cost of additions that year, so buying another asset for the same class in the same year can reduce or cancel it (CRA Guide T4002; CRA Folio S3-F4-C1, paragraph 1.95).

The whole amount is added to income for the year of the sale, as ordinary income rather than a capital gain (Income Tax Act, subsection 13(1)). If the buyer pays over several years, the CRA still requires the entire recapture in that year and allows no reserve (CRA Folio S3-F4-C1, paragraph 1.97).

A sole proprietor enters it on line 8230, Other income, in Part 3C of Form T2125. A corporation's Schedule 8 carries it to line 107 of Schedule 1 (CRA: T2125 column 7; CRA Schedule 8). No CCA can be claimed on a class with a negative balance.

What is a terminal loss, and do I get one after selling all my tools?

A terminal loss is the balance left in a class once you no longer own any property in it. You have one only if, at the end of the year, the class is empty and a balance remains (Income Tax Act, subsection 20(16); CRA Guide T4002).

The loss is deducted in full from income for the year of the sale, unlike a capital loss, which is only partly deductible. A sole proprietor enters it on line 9270, Other expenses, in Part 4 of Form T2125; a corporation's Schedule 8 carries it to line 404 of Schedule 1. A loss larger than the year's income becomes a business loss that can be carried to other years, a non-capital loss (CRA Folio S3-F4-C1, paragraph 1.99). A sole proprietor whose fiscal period is not the calendar year and who has stopped the business tests the class at the end of the calendar year instead (Income Tax Act, subsection 20(16.3)).

Three rules decide whether the loss exists:

• One item left. Property kept in the class, even unused, means no terminal loss for that class (CRA Folio S3-F4-C1, paragraph 1.100).
• Personal use afterward. If you keep a tool and start using it for something other than the business, the Act treats it as sold at fair market value on that day, which can produce recapture or, if nothing else is left in the class, a terminal loss (Income Tax Act, paragraph 13(7)(a); CRA Folio S3-F4-C1, paragraph 1.100).
• Sold, then back in the family. If the sale price is below the lower of the item's cost and its share of the class balance, and 30 days later you or a person affiliated with you, such as your spouse or a corporation you control, owns the item or can acquire it, the loss is not allowed at once. The buyer need not be the affiliated person. The shortfall stays in your class as deemed property until a release event listed in the Act (Income Tax Act, subsection 13(21.2)). A spousal transfer is first tested under the rollover above.

What if I sold the asset for more than I paid?

The sale price, less selling costs, comes off the class up to the asset's cost; what is above cost is a capital gain (CRA: capital gains and CCA; Income Tax Act, subsection 40(1)). Only 50% of a capital gain is taxable (Income Tax Act, section 38). A sole proprietor lists the sale on Schedule 3 with the personal return; a corporation reports it on Schedule 6 (CRA Guide T4002; CRA Schedule 1). If part of the price is payable after the year end, a reserve may spread the capital gain over a maximum of five years, but never the recapture (Income Tax Act, paragraph 40(1)(a)).

Both can happen on one sale: recapture of CCA already claimed, plus a capital gain on the amount above cost (CRA Guide T4037). The reverse never works: depreciable property cannot produce a capital loss, and a loss shows up only as a terminal loss (Income Tax Act, paragraph 39(1)(b)).

What if I also used the laptop or truck personally?

Only the business share counts. The Act treats the business share of a mixed-use asset as the depreciable property and gives it the same share of the sale price (Income Tax Act, paragraph 13(7)(c)).

On Form T2125, Area D uses the same method you used when you bought the item (CRA Guide T4002):

• Regular method: split the sale price into a business part and a personal part.
• Administrative method: enter the full price, then work out the allowable part of any recapture or terminal loss yourself.

For the personal part, cost and proceeds are each treated as at least $1,000, so a gain arises only when it sells for more than that, and a loss on it is generally not allowed (Income Tax Act, subsection 46(1); CRA Guide T4037). The business share is the share of regular use that was for the business while you owned the item, so keep the records behind it, such as a vehicle logbook.

Do cars follow the same rules as laptops and tools?

Not if the car is a Class 10.1 passenger vehicle. The terminal-loss rule does not apply to it, and the recapture rule does not apply unless the vehicle was designated immediate expensing property (Income Tax Act, subsection 20(16.1); Income Tax Act, subsection 13(2); CRA Schedule 8). In plain terms: selling such a car below its balance gives no terminal loss, and selling it above its balance gives no recapture unless it was ever designated immediate expensing property. A price above what the car cost is still a capital gain.

A passenger vehicle is in Class 10.1 when its cost before tax was above the limit for the year it was bought; CRA lists each year's limit. A car at or below the limit is in Class 10 and follows the ordinary rules above. In the year you sell a Class 10.1 vehicle that you owned at the start of the year, you may claim 50% of the CCA you could have claimed had you kept it (CRA Guide T4002).

A zero-emission car in Class 54 that cost more than the Class 54 limit is not excluded from recapture or terminal loss. In an arm's-length sale its sale price, like that of an over-limit passenger vehicle ever designated immediate expensing property, is scaled down in proportion before it comes off the class; a non-arm's-length sale is not scaled (Income Tax Act, paragraph 13(7)(i); CRA Guide T4002).

Whether a pickup or van counts as a passenger vehicle depends on its seating and use; see buying a car through your business.

How does a corporation report the sale, and how does it show in the books?

A corporation reports the sale on Schedule 8: the sale price goes in the proceeds column, limited to the asset's cost, and the schedule shows any recapture or terminal loss (CRA Schedule 8).

The books show the same sale differently. As bookkeeping practice, remove the asset at cost, remove its accumulated amortization, record the money received, and book the difference as a gain or loss on disposal. Unless selling this kind of item is the business itself, the sale price is not recorded as sales revenue.

The book gain or loss uses book value, so it is not the tax result: Schedule 8 sets the tax result and Schedule 1 reconciles the two. A sole proprietor's books need the same facts, with the tax result coming from the CCA area of Form T2125. For amortization against CCA, see amortization and CCA in corporate books.

Can I defer recapture by replacing the asset?

Buying another asset for the same class in the same year already works through the class: the cost is an addition, so it can reduce or cancel the recapture with no election. The separate replacement-property relief is narrower, and an ordinary sale of a laptop, tools or a truck does not qualify. The Act lets you postpone recapture only when the old asset was stolen, destroyed or taken by expropriation or other statutory authority, you buy a replacement used the same or a similar way before the later of the end of the second tax year after the initial year and 24 months after the end of the initial year, and you elect (Income Tax Act, section 13; CRA Folio S3-F3-C1, paragraph 1.6). The initial year is the year the proceeds first become receivable. If the loss and the replacement fall in the same year, the return's calculation is the election; for a later year, report the recapture first, then attach an election letter to the return for the year you buy the replacement and ask for a reassessment (CRA Folio S3-F3-C1, paragraphs 1.15 and 1.24).

For a voluntary sale the rule reaches only a "former business property", which the Act defines as real property and a few other things, not a laptop, tools or a truck (Income Tax Act, subsection 248(1); CRA Folio S3-F3-C1, paragraph 1.27). The CRA's short replacement property page speaks of business property in general, so read the Act's definition before relying on it. A deferral only postpones the tax.

What if I scrap it, trade it in or give it away?

Each case sets a different sale price:

Receiving nothing does not by itself prevent a disposition. The CRA's archived Interpretation Bulletin IT-460 is guidance, not law, and the CRA says it is no longer updated. It treats property that is destroyed with no right to compensation, or lost or abandoned beyond reasonable expectation of recovery, as disposed of, and allows zero as the sale price when there are no actual or deemed proceeds (IT-460, paragraphs 2 and 3). The Act's definition of "disposition" does not list abandonment (Income Tax Act, subsection 248(1)). Merely ending use or writing the item off in the books is not enough, and a terminal loss still needs the class to be empty. Keep proof of the disposal and do not claim a loss until the facts are confirmed; this is a case for a bookkeeping and tax review.

Example

Figures are illustrative and in Canadian dollars.

A freelancer sells one laptop

A sole proprietor owns two older computers in Class 50 and the class balance is C$2,000. She sells one, which cost C$900, for C$300, and buys nothing else that year. The balance falls to C$1,700. It is still positive and a computer remains, so there is no recapture and no terminal loss; later CCA is figured on C$1,700.

Had she sold it for C$1,100, only the C$900 cost would come off the class, leaving C$1,100. The extra C$200 is a capital gain, of which half is taxable.

A tradesperson sells all his tools and stops

A sole proprietor's Class 8 balance at the start of the year is C$5,000. He closes the business and sells every Class 8 tool for C$2,000 in total, below their cost. The balance falls to C$3,000 and no Class 8 property is left, so he has a C$3,000 terminal loss, deducted on line 9270 of Form T2125.

Had he kept one wrench, the class would not be empty and there would be no terminal loss for that year.

A corporation sells a work truck

A corporation sells a work pickup that meets the Act's tests for not being a passenger vehicle, so it is in Class 10, not Class 10.1. The truck cost C$40,000 and sells for C$25,000. The class balance before the sale is C$10,000, all of it this truck.

The balance becomes C$10,000 − C$25,000 = −C$15,000: C$15,000 of recapture, added to income on line 107 of Schedule 1. The books carry the truck at C$18,000 (cost less accumulated amortization) and show a C$7,000 gain. Schedule 1 deducts that book gain on line 401 and adds the recapture, so the tax result is the recapture, not the book gain.

Different for you?

• You do not know your class balance, or never kept a CCA schedule: the sale cannot be reported correctly without it. Rebuilding the balances from purchase invoices and earlier returns is bookkeeping and catch-up work; catching up on overdue books covers the steps.
• You sold the asset in an earlier year and did not report it, or the CRA has asked about it: recapture and a terminal loss belong to the year of the sale, so that year's return may need to change. See catching up on unfiled returns, unreported income and voluntary disclosure or, for a corporation, catching up on unfiled corporate returns, and get bookkeeping help to rebuild the class balances for the years in between.
• You sold or gave the asset to a relative or to a corporation you control: price, loss, the 30-day rule and the spousal rollover all depend on the facts. A transfer below market value to a spouse, a person under 18 or someone you do not deal with at arm's length can also make the recipient jointly liable for your unpaid tax, up to the lesser of the value received over what was paid and your tax debts for that year and earlier years, and the CRA can assess it at any time (Income Tax Act, section 160). Have the sale papers, class balances and any tax owing reviewed (bookkeeping help) before the return is filed.
• You are closing a corporation: every asset sold or kept in the final year decides recapture or a terminal loss on the last return, and the final books must match. See closing a corporation and get bookkeeping help for the closing books.
• You are stopping a sole proprietorship with a GST/HST account: assets you keep can create GST/HST to pay; see closing a GST/HST account.
• A corporation's books show amortization: see amortization and CCA in corporate books and year-end financial statements.
• The asset was used in a rental: see claiming CCA on a rental and selling a rental property.
• You moved equipment into a corporation you own: that transfer is a disposition, and a section 85 election can defer the tax, except where the transfer is at a loss and the stop-loss rule in subsection 13(21.2) applies; see moving a business into a corporation.
• A partnership owns the asset: partners cannot separately claim CCA on partnership property (CRA Guide T4002), so the partnership works out the result; ask who keeps its CCA schedule before you report anything.
• You or your corporation file in Quebec: this page covers federal rules; Quebec has its own return and rules, so confirm the provincial treatment before you file.