TX 1: Personal & Corporate Taxation
Module 4
Capital cost allowance
Lectures and handouts by
Don Nilson
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CCA
KEY WORDS & CONCEPTS
• 1/2 YEAR RULE
• DIFFERENT CLASSES
• LAID DOWN COST
• MOSTLY D.B. METHOD
• PERMISSIVE
• TRICKY CLASSES
• TERMINAL LOSSES/RECAPTURE
• CHANGE IN USE
• PUT IN USE
• BUZZ ACRONYMS: UCC,ECE, CCA and CEC
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CCA
• BREAK FROM PINBALL THIS WEEK
• BACKGROUND
• since 1949
• ITA version of GAAP depreciation
• Unlike GAAP:
• No choice in methods or rates
• They are prescribed
• Mostly declining balance
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1
CCA
• EXAM APPROACH
• memorize the classes, rates and rules
• understand the application of:
• dispositions
• “half-year” rule
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CCA
• GENERAL CHARACTERISTICS
• permissive
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CCA
• GENERAL CHARACTERISTICS
• permissive
• UCC like NBV
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2
CCA
• GENERAL CHARACTERISTICS
• permissive
• UCC like NBV
• series of prescribed classes with rates
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CCA
• GENERAL CHARACTERISTICS
• permissive
• UCC like NBV
• series of prescribed classes with rates
• asset pools
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CCA
• GENERAL CHARACTERISTICS
• permissive
• UCC like NBV
• series of prescribed classes with rates
• asset pools
• gain/loss is different
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3
CCA
• COST
• LIKE GAAP
• Laid down cost
• In Canadian currency
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CCA
• COST
• INCREASED BY ADDITIONS
• Doesn’t need to be NEW
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CCA
• COST
• DECREASED BY:
• annual claim of CCA
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4
CCA
• COST
• DECREASED BY:
• annual claim
• proceeds of disposal < original cost
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CCA
• COST
• DECREASED BY:
• annual claim
• proceeds of disposal
• grants/credits
• government
• landlord
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CCA
• COST
• DECREASED BY:
• annual claim
• proceeds of disposal
• grants/credits
• recapture/terminal loss
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5
CCA
• GAIN/LOSS SYSTEM
• For dispositions, apply the lesser of:
– Original cost
– Proceeds
To the pool
• Proceeds> original cost = capital gain
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CCA
• GAIN/LOSS SYSTEM
– Only measured at year-end
• Implies later additions may shelter dispositions
– “Pooling” aspect shelters some dispositions
–
can result in:
• “Terminal loss” – proceeds less than
depreciated value – “UCC”
• “Recapture” – proceeds greater than
depreciated value and less than original cost
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CCA
• GAIN/LOSS SYSTEM
– can result in:
• “capital gain” – proceeds greater than original
cost
• BUT, by definition, cannot have a CAPITAL
LOSS with a depreciable asset, only a
TERMINAL LOSS
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6
Example of Treatment of Disposals
Assume: Original cost=$10,000
and U.C.C.=$8,000
• Case A
– sold for
$8,000
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Example of Treatment of Disposals
Assume: Original cost=$10,000
and U.C.C.=$8,000
• Case A
– sold for
$8,000
• Answer A
– NO gain or loss
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Example of Treatment of Disposals
Assume: Original cost=$10,000
and U.C.C.=$8,000
• Case B
– sold for
$6,000
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Example of Treatment of Disposals
Assume: Original cost=$10,000
and U.C.C.=$8,000
• Case B
– sold for
$6,000
Answer B
– Terminal loss of
$2,000
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Example of Treatment of Disposals
Assume: Original cost=$10,000
and U.C.C.=$8,000
Case C
– sold for
$11,000
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Example of Treatment of Disposals
Assume: Original cost=$10,000
and U.C.C.=$8,000
Case C
– sold for
$11,000
• Answer C
– Recapture $2,000
&
– Capital Gain
$1,000
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8
Example of Treatment of Disposals
Assume: Original cost=$10,000
and U.C.C.=$8,000
• Case D
– sold for
$9,000
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Example of Treatment of Disposals
Assume: Original cost=$10,000
and U.C.C.=$8,000
• Case D
– sold for
$9,000
• Answer D
– Recapture $1,000
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Example of Treatment of Disposals
Assume: Original cost=$10,000
and U.C.C.=$8,000
• Case E
• B with a twist
• Only asset
in class? Eg,
5,000+5,000
• Proceeds=
$6,000
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9
Example of Treatment of Disposals
Assume: Original cost=$10,000
and U.C.C.=$8,000
• Case E
• Answer E
– Capital gain of
• B with a twist
$1,000
• Only asset
–
UCC pool of
in class? Eg,
$3,000
5,000+5,000
• Proceeds=
$6,000
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• Case A
• Answer A
– sold for $8,000
• Case B
– NO gain or loss
• Answer B
– Terminal loss of
$2,000
– sold for $6,000
• Case C
– sold for
$11,000
• Case D
– sold for $9,000
• Case E
• Only asset in
class?
• Answer C
– Recapture $2,000 &
– Capital Gain $1,000
• Answer D
– Recapture $1,000
• Answer E
– Capital gain of $1,000
– UCC pool of $3,000
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Class 10.1 disposition
• Special treatment
– NO recap or terminal loss
– Instead ½ normal CCA in year of
disposition
• That’s it!
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TAX-Anecdote
Anecdotes from
history in the
world of taxation
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Bonus track-lanyap
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CCA
• BUILDINGS &
SUBJACENT LAND
• report land &
building separately
• latter may have
recap/terminal
loss
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CCA
• BUILDINGS & SUBJACENT LAND
• report land & building separately
• latter may have recap/terminal loss
• ITA doesn’t like terminal loss on building and
capital gain on land: Why?
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CCA
• BUILDINGS & SUBJACENT LAND
• report land & building separately
• latter may have recap/terminal loss
• ITA doesn’t like terminal loss on building and
capital gain on land: Why?
• Gain is half-taxed
• Terminal loss is fully deductible
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CCA
• BUILDINGS & SUBJACENT LAND
• report land & building separately
• latter may have recap/terminal loss
• ITA doesn’t like terminal loss on building and
capital gain on land
• Causes arbitrary reallocation of P.O.D.
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12
Subjacent problem: example
Fact pattern
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Subjacent problem: example
Solution
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Subjacent problem: example
Solution - amended
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CCA
• CLASSES
• see REGS PART X1
• scheds 2 & 3
• Excludes plants, animals, land and intangibles
• Pools ! Not individual assets
• Exceptions for:
• Rental buildings > $50,000
• Different locations
• “Available for use” or “put in use”
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CCA
• CLASSES
• reference T2S(8) on software
• Text Example 6-17 format
• common classes
• see text Table 6-1
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CCA CLASSES
• 1,3,6 Buildings
• 8 Furn & Equip
• 10 hardware* &
autos
• 10.1 passenger
vehicles
* Min $1,000
• 4/5/10% DB
• 20% DB
• 30% DB
• 30%, $30,000
• Separate pool
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14
CCA CLASSES
• 12 software& small
• 13 Leaseholds
• 14 franchises (or
CEC) & patents*
• 43 manufacturing
after 1992
• 100% DB
• Situation specific SL
• Situation specific SL
• 30% DB
* See also 44
43
CCA CLASSES
• 44 patents after ‘93
• 45 hardware 04-07
• 25% DB
• 45% DB
* 2007 Budget
proposals not
included
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TAKE-A-BREAK
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CCA
• CCA CALCULATION
• remember: permissive in real life
• Why not claim the max?
• …in the exam… claim the max
• Can’t double-up for missed years
• also prorate for short years
• Rental income “stop loss” rule
• Cannot create or increase rental loss by
claiming CCA
• On pooled property basis
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CCA
• CCA CALCULATION
• 1/2 year rule
• on NET additions, only if positive
• some classes excluded
• 14,15, certain 12 and Section 85
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5 CCA examples:
Class 8-20%
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5 CCA examples:
Class 8-20%
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5 CCA examples:
Class 8-20%
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5 CCA examples:
Class 8-20%
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5 CCA examples:
Class 8-20%
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5 CCA examples:
Class 8-20%
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5 CCA examples:
Class 8-20%
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5 CCA examples:
Class 8-20%
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5 CCA examples:
Class 8-20%
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5 CCA examples:
Class 8-20%
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19
CCA
• Class 13 Leasehold improvements
– tricky one: straight line
– “situation specific” to particular lease
– essentially a series of sub-accounts, by lease
year addition
– period is “remaining years in lease plus one
renewal period”
– but minimum denominator is 5
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Example of Leasehold
5+5 year term
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Example of Leasehold
5+5 year term
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Example of Leasehold
5+5 year term
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Example of Leasehold
5+5 year term
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Example of Leasehold
5+5 year term
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21
Example of Leasehold
5+5 year term
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Example of Leasehold
5+5 year term
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Example of Leasehold
5+5 year term
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Example of Leasehold
5+5 year term
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Example of Leasehold
5+5 year term
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Example of Leasehold
5+5 year term
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Example of Leasehold
5+5 year term
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Example of Leasehold
5+5 year term
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Example of Leasehold
5+5 year term
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ELIGIBLE CAPITAL
PROPERTY
• CUMULATIVE ELIGIBLE CAPITAL
• INCLUDES:
• Goodwill
• “Other nothings”
•
•
•
•
Incorporation costs
Some legal and ac/ng re reorganizations
Customer lists
Unlimited franchise
• Instead of Class 14
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ELIGIBLE CAPITAL
PROPERTY
• 3/4 Capitalized
• 7% declining balance
• NO ½ year rule
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ELIGIBLE CAPITAL
PROPERTY
• 3/4 capitalized
• 7% declining balance
• NO 1/2 year rule
• 3/4 out on Proceeds of Disposition
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ELIGIBLE CAPITAL
PROPERTY
• 3/4 capitalized
• 7% declining balance
• NO 1/2 year rule
• 3/4 out on Proceeds of Disposition
• PRE '72 costs don’t count, but their
POD does!
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ELIGIBLE CAPITAL
PROPERTY
• RECAP/TERMINAL LOSS
• By definition, NO capital gain or loss
• Captured in recap/terminal loss above
• 2000 CHANGES:
• CEC inclusion rate for dispositions dropped to 1/2
in Oct ‘00, while addition rate continues at 3/4ths
• Study Example 6-6 in text
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