CCA-notes - Tran Chung Capital Cost Allowance and...

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Tran Chung Capital Cost Allowance and Cumulative Eligible Capital INTRODUCTION For many taxpayers, capital expenditures represent the most significant cost of doing business. Paragraph 18(1)(b) of the Income Tax Act prohibits the deduction of capital expenditures; however, paragraph 20(1)(a) allows a taxpayer to deduct an amount with respect to the capital cost of property to the extent allowed by the Income Tax Regulations. The regulations contain a multitude of detailed rules that make up the CCA system. The CCA system became effective January 1, 1949. It was designed to be simpler and more equitable than its predecessor. Although many modifications have been made over the years, the basic structure of the original CCA system remains intact today. The system gives taxpayers the statutory right to make a discretionary claim in respect of an eligible capital acquisition equal to any amount up to the maximum allowed under the regulations. CCA is generally calculated on a declining balance basis at the prescribed rate on the undepreciated capital cost (UCC) of depreciable property grouped in prescribed classes. The myriad of factors to be considered in determining a CCA claim are discussed below under three major headings: 1. eligibility for inclusion in CCA classes, 2. calculation of CCA, and 3. restrictions on CCA claims. ELIGIBILITY FOR INCLUSION IN CCA CLASSES As noted above, the CCA system applies to capital expenditures. Jurisprudence has established a number of criteria that may be considered in determining whether an expenditure is capital in nature. For example, capital expenditures generally produce an enduring benefit, while expenditures of a current nature produce an immediate benefit but have little or no long-term effect. Property must be included in the regulations in order to be eligible for CCA. The regulations apply to tangible depreciable assets such as buildings, equipment, and furniture and fixtures, and to intangibles such as patents, franchises, and leasehold improvements. No depreciation is allowed for land. Goodwill and other intangibles are entitled to a tax writeoff as eligible capital expenditures . Regulation 1102 specifically excludes from the CCA classes certain property including the cost of property that is deductible in computing income, inventory, property that was not acquired for the purpose of gaining or producing income, property acquired that qualifies for a deduction under section 37 of the Act, land, and property owned by a non-resident person that is situated outside Canada. Major Classes that will be covered in Class Class 1 – building (4%) © 2010 Tran Chung 1
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Class 3 – building pre-1988 (5%) Class 8 – various machinery, equipment and furniture (20%) Class 10 – Vehicles and other (30%) Class 10.1 – “Luxury” cars (30%) Class 12 – computer software and small assets (100%) Class 13 – leasehold improvements (straight-line) Class 14 – limited life intangibles (straight-line, no half year rule)
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This note was uploaded on 11/03/2010 for the course COMM 355 taught by Professor Trancheung during the Winter '10 term at The University of British Columbia.

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CCA-notes - Tran Chung Capital Cost Allowance and...

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