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Chapters 7 & 8 solutions - CHAPTER SEVEN SOLUTIONS...

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CHAPTER SEVEN SOLUTIONS Solution to Assignment Problem Seven - 1 As the equipment purchased in 2006 is for manufacturing and processing, it would be allocated to Class 43. This declining balance class is subject to a 30 percent rate. The maximum CCA would be calculated as follows: Capital Cost Of Assets $500,000 Previous Year’s CCA (Less Than Maximum Of $75,000) ( 50,000) Balance - Beginning Of Current Year $450,000 Capital Grant ( 40,000) Proceeds Of Disposition (Note) ( 230,000) Balance Before CCA $180,000 Maximum CCA At 30% ( 54,000) January 1, 2008 UCC Balance $126,000 Note The capital cost of the equipment sold is $230,000 [(1/2)($500,000 - $40,000)]. The $45,000 ($275,000 - $230,000) amount of proceeds in excess of the capital cost would be treated as a capital gain, rather than as a deduction from the UCC of the class.
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Solution to Assignment Problem Seven - 2 Part A The maximum CCA for each of the three years would be calculated as follows: Class 1 Class 8 2005 Additions $255,000 $2,800 One-Half Net Additions ( 127,500) ( 1,400) CCA Base $127,500 $1,400 Maximum CCA: [(4%)($127,500)] ( 5,100) [(20%)($1,400)] ( 280) Add: One-Half Net Additions 127,500 1,400 January 1, 2006 UCC $249,900 $2,520 Opening 2006 UCC $249,900 $2,520 Disposition - Lesser Of: Proceeds Of $3,200 Cost Of $2,800 ( 2,800) Maximum CCA At 4 Percent ( 9,996) Recapture Of CCA 280 January 1, 2007 UCC $239,904 Nil Opening 2007 UCC $239,904 Dispositions - Lesser Of: Deemed Proceeds Of $105,000 [(1/3)($315,000)] Cost Of $85,000 [(1/3)($255,000)] ( 85,000) Balance For CCA Determination $154,904 Maximum CCA is Lesser Of: $6,196 [(4%)($154,904)] Net Rental Income Before CCA Of $5,300 ( 5,300) January 1, 2008 UCC $149,604 The disposition of the Class 8 assets for more than their capital cost would create recapture and a taxable capital gain of $200 [(1/2)($3,200 - $2,800)]. In 2005 and 2006, his rental income before CCA is greater than his maximum CCA and, as a consequence, he can deduct maximum CCA for these years. In 2007, his rental income of $5,300 limits the amount of CCA that can be deducted, as the deduction of CCA cannot be used to create or increase a loss on a rental property. Part B Mr. Taylor’s decision to occupy one-third of his rental property represents a change in use that will be considered a deemed disposition of one-third of the property at fair market value. This will result in a taxable capital gain that can be calculated as follows: Building Land Deemed Proceeds (One-Third Of Market Values) $105,000 $40,000 Adjusted Cost Base (One-Third Of The Original Cost Of Building And Land) ( 85,000) ( 30,000) Capital Gain $ 20,000 $10,000 Inclusion Rate 1/2 1/2 Taxable Capital Gain $ 10,000 $ 5,000
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There is an election to defer recognition of gains on the conversion of a principal residence to a rental property, provided no CCA is claimed. However, as Mr. Taylor claimed CCA on the unit he has moved into, he cannot make this election. This election is covered in Chapter 10 .
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Solution to Assignment Problem Seven - 3 Class 1 - Building The maximum CCA amount is $5,160 [($258,000)(1/2)(4%)], leaving a January 1, 2008 UCC balance of $252,840 ($258,000 - $5,160). Class 3 - Building There were no additions or dispositions in this class. As a consequence, the maximum CCA would be $78,100 [(5%)($1,562,000)], leaving a January 1, 2008 UCC balance of $1,483,900 ($1,562,000 - $78,100).
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