Canadian Taxes A to Z (2018): A is for Amortization

Thanks to Kelly Phillips Erb, aka @taxgirl and writer for Forbes, for originating the taxes A to Z idea, and giving me permission to adapt it to Canada. Her snappy, clear and cogent writing is capable of making anyone understand (and dare I say it, "like") tax. Like her, I took a tax course in law school, and loved it (much to my surprise). Now I help folks with Canada Revenue Agency (CRA) disputes, occasionally taking them as high as the Supreme Court of Canada.

I see Kelly's already up to the letter "R" (for Relief Funds) for the 2018 tax filing deadline in the U.S., whereas I'm stuck with the letter "A" for an April 30th deadline in Canada. I've clearly got some catching up to do! 

HOW AMORTIZATION IS A TAX CONCEPT

Today, A is for Amortization. You've probably heard about amortization when it comes to paying down your mortgage, but you might not have thought about it as a tax concept. 

You generally "depreciate" significant tangible property you purchase to earn income, like a vehicle or a building. The Income Tax Act refers to this as Capital Cost Allowance (CCA), and specifies a variety of rates depending on the type of property. 

For intangible property you acquire to earn income, like goodwill or intellectual property, you "amortize" it. The Income Tax Act calls this Eligible Capital Property, and again you can write it off at a certain percentage a year. 

You "amortize" intangibles rather than "depreciate" them, because they in theory can have an indefinite life that never wears out (unlike that orange Volkswagen camper van painted with flowers that you used to use in your outfitter business). 

HOW WHAT IS AMORTIZED IS A MOVING TARGET

Generally Accepted Accounting Principles (GAAP) rules have recently changed so that goodwill is now treated somewhat differently than other intangibles for write down purposes, so that it's tested each year for impairment, rather than simply (yes, perhaps I'm overly stretching the meaning of the word "simply" here) "amortized." But you still amortize other intangibles like patents, as they'll eventually expire.

The concept to get here is that if you've purchased something for the purpose of earning income, then you're allowed to gradually deduct its cost as it wears out - even if its not a tangible thing. But since goodwill (and supposedly diamonds) is forever, you might not be able to deduct it unless you can show some proof of its diminishing in value. 

HOW AMORTIZATION WINDS UP IN THE TAX COURT OF CANADA

You can get in all sorts of trouble with the CRA by trying to deduct something as a current expense at a 100% rate that should actually be amortized. But I also help clients where the CRA sometimes unfairly denies current expense deductions of something that the CRA claims requires amortization, but which in my opinion does not. Ultimately the Tax Court of Canada gets to decide. 

A Frankfurt team of accountants has come up with with this cool (at least for those of us fond of tax concepts) comparison of tax amortization rates by country and type of intangible: http://www.taxamortisation.com.

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.