CCA & Eligible Capital Property

CCA & Eligible Capital Property - 1 DRAFT CAPITAL...

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1 DRAFT CAPITAL COST ALLOWANCE AND ELIGIBLE CAPITAL PROPERTY ©F. BARRY GORMAN, PHD, CA, TEP INTRODUCTION PART I — CAPITAL COST ALLOWANCE 1. Overview (a) Depreciation Not a Deductible Expense (b) What is Depreciable Property? (c) Non-Depreciable Property 2. The Mechanics (a) Overview (b) Additions to a Class (c) Date of Acquisition (d) Deductions from a Class (e) Deduction of Annual CCA (f) Undepreciated Capital Cost 3. Recapture and Terminal Losses (a) Positive Balance – Physical Assets Remaining on Hand (b) Positive Balance – No Assets Physically Left on Hand (c) Negative Balance in the Pool 4. Half-Year Rule 5. Available-For-Use Rule 6. CCA Classes and Rates (a) Declining Balance Classes (b) Incentive Classes For Manufacturers and Processors (c) Straight-Line Classes 7. Specific Rules (a) Separate Classes (b) Short Fiscal Years (c) Non-Arm’s Length Transfers (d) Adjustment of Prior CCA Claims (e) Class Changes (f) Capitalization of Borrowing Classes (g) Bad Debts on Disposition of Depreciable Property (h) Price Adjustment Clauses (i) Donations of Depreciable Property (j) Termination of a Business 8. Tax Planning PART II — ELIGIBLE CAPITAL PROPERTY, GOODWILL, AND OTHER “NOTHINGS” 1. Introduction
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2 2. Computations 3. Credit Balance After a Disposition — Eligible Capital Amounts 4. Termination of a Business (a) Positive Balance (b) Negative Balance 5. Reserves 6. Bad Debts 7. Corporation Capital Dividend
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3 INTRODUCTION Part I of this note discusses the capital cost allowance (CCA) rules found in Division b (the rules for determining business and property income), more specifically in ITA 13, ITA 18(1)(b), and ITA 20(1)(a). ITA 13(21) (definition of “undepreciated capital cost”) outlines the framework for the mechanics of the CCA system. Students should review and ensure that they understand this paragraph. Many rules are similar to the capital gains rules, which is to be expected as depreciable property is capital property. The annual write-off and other tax consequences of depreciable property are based on the capital cost and proceeds of disposition, where applicable. Schedule II of the Regulations specifies the assets included in each CCA class. Regulation 1100(1)(a) sets out the maximum write-off rates for individual CCA classes. Conceptually, these rates establish annual temporary allowances, which are adjusted when the asset is disposed of. Because of their impact on after-tax cash flows, the CCA rules, and especially changes to the rules, are critically important to management. Part II discusses the rules related to goodwill and other non-tangible assets. PART I CAPTIAL COST ALLOWANCE 1. Overview (a) Depreciation Not a Deductible Expense ITA 18(1)(b) prohibits the deduction of any amount on account of capital except as expressly prescribed in Part I of the Act. Therefore, depreciation recorded on the financial statements (which is essentially an allocation of the cost of the asset over its estimated useful life) is not deductible
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This note was uploaded on 01/07/2012 for the course ACCT 4453 taught by Professor Gorman during the Spring '11 term at Dalhousie.

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CCA & Eligible Capital Property - 1 DRAFT CAPITAL...

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