Chapter 06

Chapter 06 - Chapter Six CHAPTER 6 THE ACQUISITION, USE,...

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Chapter Six CHAPTER 6 THE ACQUISITION, USE, AND DISPOSAL OF DEPRECIABLE PROPERTY SOLUTIONS TO REVIEW QUESTIONS 1. The determination of amortization for accounting purposes is extremely subjective, requiring an estimate of an asset's useful life, annual usage, and salvage value. Consequently, assets of a similar type are subject to a wide range of amortization rates and methods even though they may be used for similar purposes in similar type businesses. The arbitrary capital cost allowance system overcomes the consequence of subjectivity associated with amortization methods and eliminates the need for an excessive amount of assessment review by CRA. In addition, it treats all assets within a general category in the same manner providing equal treatment to each taxpayer. In some respects the system is unfair because it gives no consideration to the way in which different businesses use similar assets and therefore the CCA system may not conform to economic reality. 2. The two categories are Depreciable Capital Property and Eligible Capital Property. (The Income Tax Act uses the term depreciable property even though accounting uses the term "amortization"). Depreciable property includes primarily tangible assets such as equipment, vehicles and buildings although it can also include certain intangible assets with a defined limited legal life. Eligible Capital Property consists of intangible assets that have no specified legal life such as goodwill, customer lists, licences, incorporation costs and so on. 3. Yes, individuals who are employed may claim capital cost allowance in certain circumstances. Employees earning employment income can only claim capital cost allowance in arriving at their travel costs associated with their employment duties. CCA can be claimed only on automobiles, aircraft (and musical instruments). Employment income cannot be reduced by CCA on any other type of asset even if it is used in the performance of employment duties [S. 8(1)(j) & (p)]. 4. Although total cost of acquiring and preparing the land for use is $65,000, the several component parts are treated differently. Land ($50,000) is a capital asset because it has a long- term and enduring benefit and is not deductible as an expense. In addition, it does not qualify as depreciable property and no capital cost allowance is available. 65
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Chapter Six Legal fees ($2,000) to complete the purchase agreement are capital in nature, associated with the cost of the land. It is not deductible but is merely added to the land cost [S. 18(1)(b)]. Legal fees ($1,000) in connection with obtaining mortgage financing are also a capital item. However, by exception , the expense qualifies as a cost incurred to issue debt and is permitted to be deducted over five years at 1/5 per year [S. 20(1)(e)].
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This note was uploaded on 09/21/2011 for the course ACC 522 taught by Professor A.vena during the Fall '11 term at Ryerson.

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Chapter 06 - Chapter Six CHAPTER 6 THE ACQUISITION, USE,...

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