5a%20Capital%20Cost%20Allowance

5a%20Capital%20Cost%20Allowance - Capital Cost Allowance...

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Capital Cost Allowance
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Accounting Depreciation vs. Capital Cost Allowance for Tax In calculating business income: – ITA 18(1)(b) disallows the deduction of capital outlays and expenses except as expressly permitted in the Act. • The act considers accounting based depreciation to be the deduction of capital outlays, so it is not deductible – ITA 20(1)(a) allows the deduction of capital cost allowance based on the detailed rules found in the Regulations. The result is that when calculating business income, we have to start with accounting income, add back depreciation and deduct capital cost allowance. As you will learn, there are many other adjustments to accounting income as well
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Terminology Accounting Tax Acquisition cost Capital cost, Adjusted Cost Base (ACB) Amortization or depreciation expense Capital cost allowance (CCA) Net book value (NBV) Undepreciated capital cost (UCC)
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Methodology – CCA calculations Assets are assigned to “classes” Each class represents a pool of similar assets. Each class may have specific rules that apply to that class only. A declining balance calculation is generally used to calculate CCA, however some classes use a straight line method. Dispositions are handled in a unique way to the normal accounting procedures. CCA is 50% of the normal amount in the year an asset is acquired. Any amount of CCA can be deducted up to the maximum calculation.
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Layout of a CCA calculation • UCC balance, beginning of year $ 950,000 • Add: Additions during year + 300,000 • Deduct: Dispositions during year - 144,000 UCC before adjustments for half rate rule 1,106,000 • Deduct 50% of net additions - 78,000 • Base amount for CCA claim 1,028,000 • Deduct CCA for year (30% x base) - 308,400 • Add: 50% of net additions + 78,000 • UCC balance, end of year $ 797,600 The form used by CRA for CCA calculations is called T2 Schedule 8. A copy is available on WebCT.
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Additions • Asset must be owned by the taxpayer, and be in use for the purpose of producing income from business, property, and in limited circumstances, employment. • Capital cost is the full cost (in CDN $) to the taxpayer of acquiring the property, and might include freight, installation, duties, provincial sales tax, legal, accounting, appraisal fees. • If property was constructed, could include material costs, labour costs and an allocation of overhead costs.
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Additions - continued • Interest capitalization – May elect to capitalize the cost of borrowing to acquire depreciable property instead of deducting the interest cost. – This would be desirable when the deduction
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This note was uploaded on 01/31/2011 for the course MOS 4462 taught by Professor Ann during the Fall '10 term at UWO.

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5a%20Capital%20Cost%20Allowance - Capital Cost Allowance...

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