1
Q
Income tax recovery from CCA formula
A
To calculate the net present value of tax savings resulting from claiming declining-balance capital cost allowance thereby determining the net-of-tax cost of an asset:
Cost x Tax Rate x CCA Rate
Rate of return + CCA Rate
When an asset is subject to the half year rule, multiply the answer from the above formula by the result of this formula:
1 + (Rate of return / 2)
1 + Rate of return
2
Q
Types of capital property
A
- Non-depreciable capital property:
- receivables
- land
- investments
- personal-use property
- CCA not allowed
- Depreciable property:
- CCA allowed
- capital gain or capital loss may arise
- declining balance method for the most part
- assets grouped into prescribed classes with specific rates
- Eligible capital property (for intangibles)
- goodwill
- patents
- unlimited life franchises
- incorporations costs
- 75% of cost of asset in included in common pool referred to as cumulative eligible capital (CEC) subject to 7% rate of tax depreciation
- the deduction is referred to as cumulative eligible capital amount (CECA)
3
Q
Depreciable property - Exclusions
A
- property, the cost of which is deductible in computing income;
- property that is described in inventory;
- property not acquired for the purpose of gaining or producing income;
- property that is a yacht, camp, lodge, golf course, or facility for which expenses are not deductible by reason of paragraph 18(1(l)
- land; and
- property situated outside Canada that is owned by non-residents.
4
Q
Employees are allowed to claim CCA on which assets?
A
- motor vehicle costs
- aircraft costs
- musical intrument costs
For other items, employers and employees should consider leasing arrangements or independent contractor relationsip as an alternative.
5
Q
Basic rules of CCA system
A
Basic Rules of Capital Cost Allowance system
The basic rules of the capital cost allowance system can be stated for many classes quite simply as follows:
- Whenever an asset of a particular class is purchased, the full purchase cost (capital cost) is added to the balance known as undepreciated capital cost (UCC) of the class of assets;
- Whenever an asset of a particular class is sold, the full proceeds of disposition, not in excess of original cost (i.e., the lesser of proceeds and capital cost (LOCP)), is subtracted from the balance in the class of assets (proceeds in excess of capital cost may give rise to a capital gain); and
- c) At the end of the taxation year,
- If the balance in the class of assets (i.e., UCC) is positive and there are still assets in that class,
- Subtract from the balance in the account ½ of the excess, if any, of purchases minus disposals made in the year (i.e., ½ x (a – b), above),
- Deduct up to the maximum capital cost allowance (CCA) at the prescribed rate for the class on the positive balance, and
- Add back the ½ of the net amount subtracted in (A), above;
- If the balance in the class of assets is negative, take the negative balance into income as recaptured capital cost allowance and set the balance in the class at zero; and
- If the balance in the class of assets is positive, but all of the assets in the class have been disposed of such that there are no more assets physically in the class, take the positive balance, known as a terminal loss, as a deduction from income and set the balance in the class at zero.
- If the balance in the class of assets (i.e., UCC) is positive and there are still assets in that class,
6
Q
Common Property Not Affected by Half-Year Rule
A
- a book that is part of a lending library
- chinaware, cutlery, or other tableware
- a kitchen utensil costing less than $500 (less than $220 if purchased before May 2, 2006)
- a medical or dental instrument costing less than $200
- linen
- a tool costing less than $500
- a uniform
- rental apparel or costume, including accessories
- a patent, franchise, concession or licence for a limited period
7
Q
When does the half-year rule not apply?
A
The half-year rule does not apply to property acquired from a person not dealing at arm’s length with the acquirer if:
- the property was depreciable property of the transferor; and
- the transferor owned the property continuously from a day that was at least 365 days before the taxation year-end of the acquirer in the year of acquistion to the date of acquistion
8
Q
What is the available-for-use rule?
A
Capital cost allowance can only be claimed on a property when it is available for use. The half-year rule applies for the first year in which the property is available for use.
A building is available for use at the earlier of:
- when all or substantially all of the building is first used for its intended purpose, and
- the second taxation year after the year of acquisition.
A similar rule applies to expenditures in respect of scientific research and experimental development.
9
Q
What is the rule regarding:
The cost of depreciable property with trade-in?
A
The capital cost of a new depreciable property added to a class cannot exceed the cash paid for the property plus the fair market value of the old property traded in.
The fair market value is the upper limit for the value of a trade-in. An inflated value would increase the capital cost eligible for the investment tax credit.
10
Q
When must capital cost allowance be prorated?
A
Capital cost allowance proration is required for a short taxation year:
- in the first or last years of the operation of a business
- in a year in which there has been a change in fiscal year
Exceptions to short-year rule:
- Class 14 properties (patents, franshise, concession or licence for a limited period). Instead, the proration is based on the number of days in the year that the asset is owned.
- An employee’s first year of use for employment purposes of an existing car. (Half-year rule applies to purchase of a new automobile)
- Where depreciable capital property is used by an individual to earn income from a source that is property (e.g. rental icome), rather than busines, the full calendar year is considered to be the taxation year of the individual and, therefore, no prorating is necessary.
11
Q
Ownership of Property - Exception
A
- Taxpayer must own the property to be eligible to deduct the capital cost allowance.
- An exception is Class 13 leasehold improvements that are made by the tenant but the owner of the building has title to the improvements.
- After 1972, this type of expenditure would be considered an eligible capital expenditure
12
Q
List two situations in which CCA would not be claimed on
Disposition of property
A
- no claim for CCA can be made on an asset in the year of its disposition (because the sale would reduce the balance in the asset class resulting in a decrease in the amount subject to CCA for the year).
- when a property in a class no longer exists, e.g.:
- property that is stolen, destroyed, confiscated or expropriated without any compensation
- property that is lost or abandoned without expectation of recovery
13
Q
Class 10.1 Automobiles
A
- This is a separate class for automobiles having a cost in excess of $30,000 plus HST
- The rules relating to recapture of capital cost allowance and terminal loss do not apply to automobiles having a cost in excess of $30,000 plus HST.
- Instead of terminal loss there is a special capital cost allowance calculation for the year of disposition:
- 1/2 the CCA that would have been allowed if the automobile has not been disposed of may be deducted.
- To qualify for this special “half-year rule”, the automobile must have been owned by the taxpayer at the end of the preceding year.
14
Q
Class 10 Automobiles
A
- For automobiles costing less than the prescribed limit.
- The amount of capital cost allowance claimed is subject to recapture.
- Terminal loss on disposition is not allowed for employees.
- The usual rules for deducting capital cost allowance, subject to the half-year rule, inlcuding recapture, or deducting a terminal loss apply to an automobile used in a business by and owned by a proprietor,a partner, or a corporation.
15
Q
Comparison of CCA and accounting amortization
A
- Basis or write-off of a capital expenditure:
- accounting: useful life
- tax system: useful life, legal life (as in the case of leasehold improvements or patents), or fiscal policy
- Amount deducted:
- accounting adheres to consistency
- tax system: allows any amount up to the maximum permitted for each class
- Defferences between book value and proceeds from dispostion:
- accounting: gains or losses on sale of an asset
- tax system: provides write-off of actual decline in value through recapture of CCA and terminal loss deduction. Under certain circumstances there can be a capital gain however there can never be a capital loss on depreciable capital property. All declines in value are handled through the CCA deduction and the final adjustment through either recapture or a terminal loss.
16
Q
Separate class rule for electronic equipment in Class 8 r 10 and for manufacturing and processing property in Class 43
A
- for class 8 and 10
- to take advantage of the terminal loss deduction when all of the assets in the separate class are sold for less than the UCC of that class.
- to qualify, the property must have a value of at least $1,000
- can be transferred back to Class 8 or 10 after four years from the end of the taxation year of acquisition - hence the terminal loss deduction will no longer be available
- for Class 43 property (manufacturing and processing property):
- election must be filed with the income tax return for the taxation year in which the property is acquired
- After five year, any remaining UCC in each separate class must be transferred in the general Class 43 UCC pool
17
Q
Computer equipment acquired on or after March 19, 2007
A
- added to Class 50 with a CCA rate of 55% declining balance.
- a separate class election is not availabe for computer equipment added to Class 50
18
Q
Computer equipment acquired on or after January 28, 2009
A
- temporary Class 52 with 100% CCA rate
- acquired on or after January 28, 2009 and before February 2011
- half-year rule does not apply to this 100% rate
- equipment must be new and used in business carried on in Canada or for the purpose of earning income from property situated in Canada
19
Q
Classification of computer equipment
A
After Mar 22, 2004 and before Mar 19, 2007:
- Class 45
- Rate: 45%
- Half-year rule: Yes
On or after Mar 19, 2007:
- Class 50
- Rate 55%
- Half-year rule: Yes
On or after Jan 28, 2009 and before Feb, 2011:
- Class 52
- Rate 100%
- Half-year rule: NO
20
Q
Transfers to another class - Avoiding recapture
A
When a property in a certain Class has been depreciated but the government has subsequently reclassified the property in another Class, the negative UCC that would result from disposing of the property may be transferred to the newly acquired Class immediately before the disposition. If the property is replaced, the new purchase in the new Class will offset the transferred disposition. In this way the recapture of CCA in the old class will be wholly or partially avoided.
21
Q
Election to capitalize interest expense
A
- Used when there is in insufficient taxable income to use the interest deduction
- The interest may be added to the capital cost of the acquired depreciable property instead of being claimed as a current year deduction
- This election also exists for interest incurred in connection with many natural resource exploration and development properties.
- Interest and other expenditures incurred in construction, renovation, or alteration of building is are capitalized until the building is complete and, consequently, are not eligible for this election.
22
Q
How does any assistance received on the acquistion of property affect the capital cost of the property?
A
- Any assistance received such as, a grant, subsidy, forgiveable loan, deduction from tax, investiment allowance, reduces the capital cost of depreceiable property so that CCA is only claimed on the net cost of the asset.
- Investment tax credits (ITCs) are calculated after the tax payable is determined so the credit reduces the UCC in the year following the taxation year in which it is claimed.
- GST input tax credit received during the year will reduce the UCC before the CCA is determined.
23
Q
CCA method for Leasehold Improvements
A
Straight-line method is used for Leasehold improvements.
CCA calculation for leasehold interest (Class 13) for a year other than the first year :
The lesser of:
- 1/5 of the capital cost of the leasehold interest; and
- capital cost divided by the number of 12-month periods from the beginning of the taxation year in which the cost was incurred to the end of the term of the lease plus the first renewal term not to exceed 40 years
The first year write-off would be 1/2 of the above amount to provide the equivalent of the half-year rule.
The last year’s write-off would also be 1/2.
e.g. For an annual CCA of $2,000 for a total period of 8 years the CCA would be:
Year 1 1/2 x $2,000 = $1,000
Year 2 to 8 7 x $2,000 = $14,000
Year 9 1/2 x $2,000 = $1,000
The total CCA of $16,000 = 8 periods x $2,000
24
Q
List the Exceptions to the Declining Method of CCA
A
- Leasehold improvements (Class 13)
- Class 14 limited-life intangibles
25
CCA for Buildings: Class 1 or Class 1-NRB?
The rate for Class 1 is 4% but for buildings acquired after March 19, 2007:
* if the use is at least 90% for manufacturing or processing, Class 1-NRB 10% is available
* for other non-residential buildings, Class 1-NRB 6% is available
26
CCA Method for Class 14 limited-life intangibles
Straight-line CCA is used for items in Class 14 which generally include limited-life intangibles such as patents, franshises, concessions or licences.
* The capital cost of each property is prorated over the number of days in the remaining life of the Class 14 asset.
* Note: Class 14 is not affected by the half-year rule.
Patents:
* Legal life:
* 20 years if registered after 1989
* 17 years if registered before 1990
* must be in Class 44 (25% declining balance) unless taxparer elects to move it to Class 14. This is usually done if the patent is acquired late in its life so that CCA would be higher in Class 14 than in Class 44 with 25% declining balance
27
CCA Method for Manufacturing and Processing Machinery and Equipment
If acquired after March 19, 2007 and before 2014, the asset is added to Class 29 where:
* CCA rate is 50%
* using straight-line method on each asset
* half-year rule applies
Note:
* The CCA 50% is calculated on the purchase cost of the asset _not on the UCC._
* The half-year rule effectively changes the CCA rate to 25% from 50% in the year of acquisition.
* When the UCC is less that 50% of the cost of the asset, the CCA will be 100% of the UCC of the asset.
28
Insurance Proceeds Expended on Damaged Depreciable Property
Any part of insurance proceeds expended on repairing the damage:
* must be included in income
* The included amount will be offest by the deduction as an expense of repairing the property so that the net effect on taxpayer's income will be zero
Any part not expended on repairing the damage:
* will be treated as proceeds on disposition of depreciable property and will, thus, be treated according to the basic rules for proceeds.
29
Involuntary Dispositions
Definition:
* Insurance recovery for stolen, lost, or destroyed depreciable property; or
* expropriation proceeds
Treatment
* normally as proceeds on dispostion and potentially subject to recapture
Options for offsetting the recapture against replacement cost::
* The potential recapture might be offset against the cost of property of the same class acquired later in the same year.
* If the replacement occurs in a subsequent year, the taxpayer may elect, i_n the year of replacement_, to offset any recapture caused by proceeds for loss as long as replacement is made by the later of either
* 24 months after initial taxation year; or
* by the end of the 2nd taxation year following the year in which the proceeds are considered receivable.
30
For involuntary dispositions, when are the proceeds deemed to have become receivable?
At the earliest of:
* the day the taxpayer has agreed to the full amount fo the compensation'
* the day the compensation is finally determined by a court or tribunal;
* the day that is two years from the day of involuntary disposition;
* the day the taxpayer dies or ceases to be a resident of Canada: and
* the day immediately following the winding-up of a corporation (other than a Canadian subsideary owned 90% or more) where the taxpayer is a corporation.
31
# Involuntary Dispositions
Define replacement property
Replacement property is property acquired for the "same or similar use" as the original property and used for gaining or producing income from the "same or similar business" by the taxpayer or related persons.
The replacement property need not be of the same class of depreciable property as the original property.
32
Voluntary Dispositions
* Example: Disposing of a building for relocation purposes.
* replacement must be made by the later of either
* 12 months after the initial taxation year or
* by the end of the first taxation year following the year of disposition.
* Normally, a building is the only depreciable property eligible for the replacement property rules for voluntary dispositions.
* However, limited-period franchises, concessions or licence will also be eligible. The replacement rules are extended where the transferor and transferee jointly elect to have these rules apply
*
33
How do you amend a a tax return in order to apply the cost of a replacement property to the recapture of CCA?
1. Calculate the normal CCA deduction using LOCP
2. Then reduce this amount by the lesser of the following:
1. the excess, if any, of the LOCP amount over the UCC at the beginning of the year (i.e. the recapture); and
2. the cost of the replacement property
3. Deduct the result from the UCC at the beginning of the year. The answer should be zero.
4. The UCC at the end of the year should be $0 and the revised recapture should be $0 and the UCC at the beginning of the next year should be $0
34
# List the five situations covered by the
Change in Use and Part Disposition Rules
1. Change from income-producing to other purpose
2. Change from non-income-producing to income-producing purpose
3. Property acquired for multiple purposes
4. Change in proportion of use for producing income and other purposes
5. Non-arm's length transfer of depreciable property
35
Change from income-producing to other purpose
* At the time of the change of use, the taxpayer is deemed to have disposed of a depreciable asset at its fair market value.
* This can result in either recapture or terminal loss
* The difficulty is determining the fair market value without an actual transaction
36
# Describe the procedure for a
Change from non-income-producing to income-producing
At the time of the change, the taxpayer is deemed to have acquired a depreciable asset at its fair market value.
Where the fair market value is greater than its cost, the capital cost of the asset is limited to the _lesser_ of:
1. the fair market value of the asset at the time of the change is use, and
2. the total of
* the cost at the time of the change of use
* 1/2 of the excess, if any, of FMV at the time of change of use over cost at time of change of use
Another way of putting this is:
* The capital cost is the lesser of
* FMV and
* cost plus 1/2 of the capital gain
Note: The half-year rule applies in the taxation year of the change.
37
Property acquired for multiple purposes
* At the time of the purchase, the portion whose purpose is to produce income is allocated to depreciable assets of the taxpayer.
* On sale of the property, a proportionate amount of the proceeds is regarded as proceeds of a depreciable asset.
38
Change in proportion of use for producing income and other purposes
An increase of the proportion of income-producing use is deemed to be an acquisition of property. The additional capital cost would be the lesser of:
* proportion of the full FMV at the time of the change, and
* proportion of the full cost plus 1/2 of the proportion of the captial gain at the time of the change
A decrease is treated as disposition at the proprtion of the FMV of the total property at the time of the decrease in use. In practice,
* First, calculate the CCA on the UCC of the asset, and then
* reduce it by an adjustment for the proportion of non-income-producing use
39
Non-arm's length transfer of depreciable property
Only the cost plus taxable capital gain (1/2 x capital gain) of transferor can be depreciated by the transferee.
40
# List the options for treating:
Expenses of representation to obtain a patent or franchise
1. CRA suggests deducting the cost immediately (subject to recapture);
2. Deduct the cost over a ten-year period; or
3. capitalization of the cost in the appropriate CCA class (14 or 44) or in the eligible capital property pool.
Decks in class (4)
# Cards
