331- L6 Flashcards
Define undepreciated capital cost and give a numerical example.
Undepreciated capital cost is the amount of an asset class that has not been depreciated for tax purposes. For example, suppose you started a business by investing $10,000,000 in a new factory, a class 1 asset. Ignoring the first year rule, you could claim CCA of 4% of the cost of the factory. CCA = 0.04 × 10,000,000 = $400,000 You begin the next year with an undepreciated balance (known as the undepreciated capital cost or UCC) of $10,000,000 - $400,000 = $9,600,000
Define Capital Loss and give a numerical example.
A capital loss is experienced when an asset is sold for less than it cost to purchase. For example, a tract of land is purchased for $1,000,000 and in one year’s time is sold for $500,000. The capital loss is then $500,000. Note: You can never have a capital loss with a depreciable asset
Define terminal loss and give a numerical example.
When an asset is sold for more than its initial cost, the difference between the sale price and the initial cost is called a capital gain. Example: A piece of land is bought for $1,000 and one year later sold for $1,500. There would be a capital gain of $500 on this asset.
Define Capital Gain and give a numerical example.
When an asset is sold for more than its initial cost, the difference between the sale price and the initial cost is called a capital gain. Example: A piece of land is bought for $1,000 and one year later sold for $1,500. There would be a capital gain of $500 on this asset.
Define CCA recapture and give a numerical example.
When the sale of an asset would result in an asset class with a negative balance, the amount of the negative balance is referred to as recaptured depreciation or CCA recapture, and is included in taxable income. The UCC of the asset class is then set to zero. For example, consider a building which initially cost $10,000 and has a UCC of $5,000 after 3 years of claiming CCA. If the building is sold for $7,000, then this leaves a $2,000 CCA recapture, which is treated as taxable income.
Describe the optimal holding period for a real estate investment under 5 different assumptions: a perfect marker, transaction costs, debt financing, straight line CCA and accelerated CCA.
Perfect Market: Because, under a perfect market, an investor could not outperform the market consistently, there is NO optimal holding period. Since the true value of the property will always be reflected in its price, it is futile to try and time the market.
Transaction Costs: To maximize returns an investor would need to minimize their transaction costs, and therefore hold on to the investment for as long as possible. The longest an investor would want to hold an investment is for its entire economic life. Therefore the optimal holding period with transaction costs is the economic life of the asset.
Debt Financing: There is little difference between this case and the one above. As the length of the investment horizon lengthens, so too does the equity share of the investment. An investor could therefore release equity through debt rollovers and thereby maximize return. Given that this is the case, again the optimal holding period is the economic life of the asset.
Straight Line CCA: The tax benefits each year will not change on the asset, and therefore will have no impact on the time horizon of the investment. Again, the optimal holding period would be he economic life of the asset.
Accelerated CCA: Again, as discussed, the accelerated CCA will not effect the optimal holding period of a real estate investment.
What is true about the tax status and income tax deduction on purchasing land and building a new store?
a. The building is depreciable using the declining balance method
b. The land is depreciable
c. CCA may be claimed as soon as construction is started
d. Only on-half of the potential CCA may be claimed in the first five years
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Lease a currently existing building and renovate it to suit his needs. The lease would be prepaid for an 8 year term (with no renewal option) and the landlord has offered an allowance of 4 months free rent for ant immediate improvements Jessie wishes to make to the building. Which of the following is TRUE about the tax status regarding income tax deductions?
Lease a currently existing building and renovate it to suit his needs. The lease would be prepaid for an 8 year term (with no renewal option) and the landlord has offered an allowance of 4 months free rent for ant immediate improvements Jessie wishes to make to the building. Which of the following is TRUE about the tax status?
a. As the lease is less than 40 years, it does not qualify as depreciable property
b. The renovation allowance would be considered a tenant inducement for taxation purposes
c. CCA does not fall under the “half-year’ and ‘available-for-use” rules
d. Tax on the tenant inducement would be due immediatelya. As the lease is less than 40 years, it does not qualify as depreciable property
b. The renovation allowance would be considered a tenant inducement for taxation purposes
c. CCA does not fall under the “half-year’ and ‘available-for-use” rules
d. Tax on the tenant inducement would be due immediately
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If renting a propertywhich of the following is TRUE about A tax status in regards to income tax payable?
b. The rent payments qualify as depreciable property under class 13
c. The rent payments are subject to the “half-year” and “available-for-use” rules.
d. The rent payments can be claimed as an expense against revenues.
e. The rent payments can be claimed as a tenant inducement
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