6
THE CHAPTER ACQUISITION, USE, AND DISPOSAL OF DEPRECIABLE
PROPERTY
KC 6-1
[ITA: 13(21), 20(1)(a); Reg. 1100(1),(2) - Additions to the pool exceed Disposals]
Class 8
UCC balance, beginning of year
Purchases
Disposals
$10,000
$40,000
(3,500)
CCA: $10,000 x 20%
$36,500 x 20% x
UCC balance, end of year
$(2,000)
(3,650)
36,500
46,500
(5,650)
$40,850
K C 6 -3
[ITA: 13(1) Recapture]
Class 12
UCC balance, beginning of year
Purchases
Disposals
Recapture of CCA
UCC balance, end of year
$1,300
$
0
(2,000)
(2,000)
(700)
700
$
0
K C 6 -5
[Reg. 1100(1)(a.2), (c); 1100(2) 1/2 year rule; Reg. 1100(3) - Short taxation year; Reg
1101(5b.1) separate class election]
Class 1:
(20X6)
Capital cost of building
CCA: $100,000 x 6% x x 245/365 days
UCC
$100,000
(2,014)
97,986
(20X7)
CCA: $97,986 x 6%
UCC
(5,879)
$ 92,107
Class 14:
(20X6) CCA:
$60,000 x
(20X7) CCA: $60,000 x
245 (# of days owned in 20X6)
= $4,025
3,652 (# of days in life of the franchise)
365 (# of days owned in 20X7)
3,652 (# of days in life of the franchise)
= $6,000
[Note the number of days in the life of the franchise includes 2 additional days for the
two leap years that would occur in the 10 years].
The building is an addition to Class 1. Since the non-residential building was
constructed after March 18, 2007, it has a 6% CCA rate based on the declining-balance
[Reg. 1000(1)(a.2)] provided Kayla elects to place the building in a separate Class 1
[Reg 1101(5b.1)]. The solution assumes she did so. The election is made by attaching a
letter to the tax return for the year In which the building is acquired.
The franchise, having a limited legal life (10 years) is an addition to Class 14, a straightline class. CCA on Class 14 is calculated by multiplying the cost by the number of days
the franchise is owned in the year divided by the total number of days in its legal life
[Reg. 1100(1)(c)].
For Class 1, the amount of CCA that can be claimed in the year the asset is acquired is
restricted to one-half the normal rate [Reg. 1100(2)]. This rule does not apply to Class
14.
Kayla, being an individual, has a calendar year-end for her business [ITA 249].
Therefore, the first taxation year is a short taxation year consisting of 245 days (May 1 to
December 31). CCA for Class 1 must be prorated by the number of days in the taxation
year divided by 365 [Reg. 1100(3)]. Prorating for a short taxation year does not apply to
Class 14.
K C 6 -6
[ITA: 20(1)(a); Reg. 1100(1)(b) Class 13 CCA]
Class 13:
20X1:
UCC balance, beginning of year
Purchases
Disposals
$
$84,000
(
0)
CCA ($12,000 x )
UCC balance, end of year
20X2:
UCC balance, beginning of year
Purchases
Disposals
0
84,000
84,000
(6,000)
$78,000
$ 78,000
$30,000
(
0)
30,000
108,000
CCA ($12,000 + $2,500)
UCC balance, end of year
20X3:
UCC balance, beginning of year
Purchases
Disposals
(14,500)
$ 93,500
$93,500
$
(
0
0)
CCA ($12,000 + $5,000)
UCC balance, end of year
0
93,500
(17,000)
$76,500
Leasehold improvements:
20X1 improvement:
$84,000 (capital cost)
4 (lease term) + 3 (1st option term)
= $12,000
Limited to 1/5 x $84,000 = $16,800
20X2 improvement:
$30,000 (capital cost)
= $ 5,000
3 (remaining lease term) + 3 (1st option term)
Limited to 1/5 x $30,000 = $6,000
The Class 13 half-year rule in Reg. 1100(1)(b) applies. Therefore, in 20X1, the CCA is
reduced from $12,000 to $6,000, and in 20X2, the CCA of $5,000 is reduced to $2,500.
K C 6 -9
[ITA: 14(1), (5); 20(1)(b) - CEC]
Cumulative eligible capital account:
Year 1:
Opening balance
Purchase of goodwill ($100,000 x )
Deduction ($75,000 x 7 %)
Year 2:
Deduction ($69,750 x 7%)
Year 3:
Sale of goodwill ($140,000 x )
Negative balance
$
0
75,000
75,000
(5,250)
69,750
(4,883)
64,867
(105,000)
$ (40,133)
Business income:
Recapture of CEC previously deducted ($5,250 + $4,883)
Taxable portion of excess ($40,133 - $10,133) x 2/3 or
($140,000 - $100,000) x 1/2
Business income
$10,133
20,000
$30,133
Solution to P 6-2
1.
The equipment qualifies as a Class 8 asset with a capital cost allowance rate of
20%. The undepreciated capital cost of the Class at the end of 20X1 (the year
before the sale) is as follows: [Reg. 1100(1)(a)(viii)]
20X0 Purchase
CCA 20% x $10,000 x 1/2
20X1 CCA 20% x $9,000
Undepreciated capital cost
$10,000
(1,000)
9,000
(1,800)
$ 7,200
In 20X2 the following occurs:
a)
Sale $3,000:
UCC
Proceeds
Terminal for loss (deduction) [ITA 20(16)]
b)
Sale for $8,000:
UCC
Proceeds
Recapture [ITA 13(1)]
c)
Sale for $12,000:
UCC
Proceeds (limited to original cost)
Recapture [ITA 13(1)]
$ 7,200
(3,000)
4,200
(4,200)
$
0
$ 7,200
(8,000)
(800)
800
$
0
$ 7,200
(10,000)
(2,800)
2,800
$
0
Plus:
Proceeds of sale
Original cost
Capital gain
$12,000
10,000
$ 2,000
Taxable (1/2)
$ 1,000
2.
If $1,000 of new equipment was purchased on the last day of the fiscal year in a)
and b) above the answer would be changed as follows:
a)
UCC
Purchase
Sale
$ 7,200
1,000
(3,000)
5,200
(1,040)
$ 4,160
CCA 20% of $5,200
The purchase eliminates the terminal loss of $4,200 because there is an asset left
in the pool. It would be advantageous to delay the purchase for one day to the first
day of the next taxation year as this would permit the full terminal loss of $4,200 in
20X2 leaving the $1,000 purchase in 20X3 for normal CCA. Cash flow from tax
savings would be enhanced.
b)
UCC
Purchase
Sale
$ 7,200
1,000
(8,000)
200
(40)
$ 160
CCA 20% of $200
The purchase of $1,000 completely eliminates $800 of recapture and therefore
enhances the current year's cash flow. Effectively, because of the impending
recapture, $840 of the $1,000 purchase price is deducted in 20X2 ($800 + $40). If
the $1,000 was delayed to the beginning of next year the full $800 recapture
would occur in 20X2 Therefore the delay is not advantageous.
Solution to P 6-3
1.
Depreciable property:
Class
UCC beginning of year
Purchases
Sale (up to original cost)
Recapture
CCA:
$190,000(20%) + $14,000(20%)(1/2)
$30,000(50%)(1/2) (note 1)
1.
8.
$200,000
$190,000
14,000
.
204,000
(230,000)
(30,000)
30,000
$
Cumulative Eligible capital:
Beginning balance
Addition (3/4) of $10,000
20X1 deduction 7% of $7,500
.
0
(39,400)
.
$164,600
$
0
7,5000
(525)
29 .
$
0
30,000
.
30,000
(7,500)
$ 25,500
$6,975
Capital Gain (Building)
Proceeds
Cost
Capital gain
Taxable (1/2) of $30,000
$260,000
230,000
$ 30,000
$ 15,000
Effect on 20X1 income:
Business income
Recapture
Less:
CCA (39,400 + 7,500)
CEC write-off
Decrease
Taxable Capital Gain
Net decrease
$ 30,000
(46,900)
(525)
(17,425)
15,000
$ (2,425)
Note 1
Manufacturing and processing equipment assumed purchased between March
19, 2007 and December 31, 2013. Otherwise, Class 43.
2.
Yes. The company could acquire a replacement building in 20X2 provided it is
used for similar purposes in conducting a business activity. The replacement in
20X2 would permit the 20X1 recapture to be reduced to zero and reduce the cost
of the replacement building [ITA 13(4)].
A similar deferral is available for the capital gain on the building [ITA 44(1)]. If the
cost of the new building equals or exceeds the proceeds for the sold building
($260,000) the entire gain can be deferred. This is discussed in Chapter Eight.
The above replacement property rules apply where the replacement property is
acquired within one year of 12 months after the end of the taxation year of the sale
and applies only to real estate used in a business and eligible capital property [ITA
44(1),(5), 13(4),(4.1), 14(6),(7)].
Solution to P 6-8
Business income:
Income per financial statements [ITA 9(1)]
Imputed salary
Amortization [ITA 18(1)(b)]
CCA on leasehold improvements (Class 13)
Original 1/10 ($12,000)
New 1/9 ($18,000) = $2,000 (1/2)
CCA on paving parking area (Class 17) $12,000 x 8% x
Legal fees for land purchase (capital item) [ITA 18(1)(b)]
Legal fees for obtaining mortgage (1/5 is deductible as a cost of obtaining
financing) add back - 4/5 x $1,200 [ITA 20(1)(e)]
Auto operating costs
Personal portion is 75% (to and from work 20% + personal 55%)
$4,300 x 75% [ITA 18(1)(h)]
CCA on auto (Class 10.1) Capital Cost is limited to $30,000 + tax
CCA - $30,000 x 30% x 1/2 = $4,500 * [ITA 13(7)(g)]
Business portion - $4,500 x 25%
Reserve for potential sales returns [ITA 18(1)(e)]
$ 9,500
38,000
3,500
$1,200
1,000
(2,200)
( 480)
1,000
960
3,225
(1,125 )
10,000
$62,380
* Assuming that the retail business is a HST registrant, the HST has not been added to
the cost of the automobile.
Total income:
ITA 3(a)
Business income
Other income - pension ($4,000 x 12)
ITA 3(d)
Allowable business investment loss
Sale of shares 1/2 ($12,000 - $20,000)
$ 62,380
48,000
110,380
(4,000)
$106,380