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ACCO643-Tax > Capital Cost Allowance > Flashcards

Capital Cost Allowance Flashcards

1
Q

Terminology-Accounting

  • What are the following terms in translated as in Tax
    1. Aquisition Cost
    2. Amortization
    3. Net Book Value

-Net Book Value is reduced every year by CURRENT year’s Amortization. What is it for Tax purposes?

A

Terminology-Tax

1. Capital Cost
2. Capital Cost Allowance (CCA)
3. Undepreciated Capital Cost (UCC)
  • For Taxation purposes UCC is reduced every year by PREVIOUS year’s CCA.
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2
Q

Capital Assets - Accounting

  • Acquisitions: Recorded in an asset account.
  • How are they recorded for tax purposes?
A

Capital Assets - Tax

  • Acquisitions:
    1. Recorded in a class.
    2. Same number as would be in accounting (Cost related to acqusition, installation, etc).
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3
Q

Capital Assets - Accounting

  • Dispositions: POD - NBV. If positive = gain ; if negative = loss.
  • How is this accounted for in Tax?
A

Capital Assets - Tax

Dispositions: See below. This MAY result in no tax consequence, capital gain, recapture or terminal loss.

                                  UCC
                                     - Lesser of/Smaller Amount:  Proceeds or Capital Cost
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4
Q

Capital Assets - Accounting

Amortization and CCA: Usually choose a method allowed by IFRS and apply it consistently to all assets in the group. Amortization = expense to current year Net income

A

Capital Assets - Tax

Amortization and CCA: Tax Act requires specific methods per class to be applied to determine maximum CCA DEDUCTION. Unlike Accounting - in tax you do not NEED to DEDUCT all CCA in any given year to come to Net Income for Tax Purposes.

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5
Q

Capital Assets - Accounting

-Why do these differences in Amortization and CCA methods between tax and accounting matter?

A

Capital Assets - Tax

  • All these differences mentioned - lead to different account balance for capital assets in accounting and tax. These are called TEMPORARY DIFFERENCES - thats why in accounting you have Future Tax Liability.
  • Starting amount for depreciable assets are the same in Acco & tax - different amortization and CCA treatment lead to differences.
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6
Q

Additions to Capital Cost

What is required for an asset to be classified within a CCA class?

A

Additions to Capital Cost

  • Asset must be OWNED by the taxpayer
  • Asset must generate Business, Property or Employment Income
  • Main difference: The asset must be capital in nature vs being inventory.
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7
Q

Additions to Capital Cost

What does capital cost entail - if asset is purchased?

What does capital cost entail - if asset constructed?

A

Additions to Capital Cost

Capital cost includes - if purchased:

  1. Full cost of acquiring it
  2. Freight
  3. Installation
  4. Duties
  5. Non-refundable sales tax (Not GST/PST)
  6. Lega/Accounting
  7. Appraisal
  8. Engineering

Capital cost includes - if constructed:
-All of the above + material/labour/overhead to produce the asset.

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8
Q

Additions to Capital Cost

When do we capitalize interest?

A

Additions to Capital Cost

-ITA 21(1) allows you to capitalize interest on depreciable property.

Cons: If you capitalize becomes part of the asset cost - cannot deduct it for Tax purposes

Pros: IF the interest is to be deducted BUT will become a non-capital loss and will be subject to the time limits (20 year carry fwd) and taxpayer for some reason doesn’t have 20 years - capitalize so you can increase CCA expense.

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9
Q

Additions to Capital Cost

How is government assistance treated?

A

Additions to Capital Cost

  • Just like GAAP - any government assistance received is to be deducted from the capital cost of the asset.
    i. e. Cannot capitalize - lower CCA
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10
Q

Additions to Capital Cost

-What does Available for User have to do with CCA?

A

Additions to Capital Cost

  • Tax rules state that you can only deduct CCA one the capital asset is available for use.
  • *Building being built - can’t claim CCA until asset is built
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11
Q

Additions to Capital Cost

-When are you required to hold different classes for similar assets?

A

Additions to Capital Cost

  • Different Businesses - if you own more than two businesses.
  • Rental Properties - above 50K
  • Luxury Cars - above 30K
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12
Q

Half-Year Rules

  • What would happen previously if people would purchase an asset anytime during the year?
  • What is the current procedure in handling part year capital asset purchase?
A

Half-Year Rules

  • In the past even if you purchased an asset at the end of the year; you would be able to deduct full years worth of CCA.
  • Currently - they say that any net additions only HALF of the CCA can be deductible.
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13
Q

Half-Year Rules

-What exception are there?

A

Half-Year Rules

Exception: Main is the transfer of a depreciable property resulting from a non-arms length transaction.

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14
Q

Short-Fiscal Periods

-What happens if and when there is a deemed year end of a company? i.e. last years business operations, acquisition of control?

A

Short Fiscal Period

  • In this case unlike the arbitrary ruling of the First year Rule - CCA is calculated on a pro-rated basis.
  • Half year rule STILL applies
  • For rental properties - short fiscal year is not applied.
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15
Q

Tax Planning

  • If you have Taxable Income - what should you do?
  • If you have a loss - what should you do?
A

Tax Planning

  • Take MAXIMUM CCA that you are allowed to deduct
  • Take CCA on the class with the lowest percentage NOW - so that the higher CCA class is reserved for next year.
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16
Q

Disposition of Depreciable Assets

  • What is a simple disposition?
  • How is this accounted for for tax purposes?
A

Disposition of Depreciable Assets

-Simple Disposition:
When the Proceeds of Disposition are LESS than Original Cost & UCC balance in the class.

-There is no tax consequence - except that the new CCA calculated will be based on the lower UCC.

17
Q

Disposition of Depreciable Assets

  • How does a capital gain arise from a depreciable asset?
  • How does a capital loss arise from a depreciable asset?
A

Disposition of Depreciable Assets

  • Capital gain will arise if the proceeds of disposition are GREATER than the original cost of the asset.
  • A capital loss can NEVER OCCUR on depreciable property.
18
Q

Disposition of Depreciable Assets

-What happens if the Proceeds of disposition are greater than the UCC? Can occur whether it is the LAST Asset OR NOT in the class.

A

Disposition of Depreciable Assets

  • This will result in bringing down the UCC balance of the class to a negative balance (Higher disposition than UCC balance in class).
  • This negative balance must be included in income as RECAPTURE.
  • The same amount must be added back to UCC balance to bring it to 0.
19
Q

Disposition of Depreciable Assets

  • How is capital gain calculated?
  • How is recapture calculated?
A

Disposition of Depreciable Assets

  • Capital gain is calculated: Proceeds - original cost of the capital asset.
  • Recapture is calculated by: Original cost - UCC balance.
20
Q

Disposition of Depreciable Assets

-What happens when it is the LAST asset in that class and the proceeds of disposition is LESS than the UCC balance?

A

Disposition of Depreciable Assets

  • If the proceeds are less than the UCC balance. This will leave a positive balance in the UCC class - considering it is the last balance this will result in a TERMINAL LOSS.
  • Not to be confused with a Capital Loss - Terminal loss is 100% deductible against any source of income.
  • Make sure to subtract back the terminal loss to the UCC balance to bring it to 0
21
Q

Recapture

-Tax suggestions

A

Recapture

  • If you have a negative balance during the year does not necessarily mean recapture - can acquire an asset and bring class balance back to positive.
  • Sometimes you need to watch out - acquisition of the new asset may have to be allocated to a new class.
22
Q

Terminal Loss

-Can employees deduct terminal losses on Capital Asset used for employment? i.e. cars?

A

Terminal Loss

-No, employees are governed by Section 8 deductions - and section 8 does not allow terminal losses to be deducted.

23
Q

Recall

-Earlier we mentioned that there are some assets that can be placed in a separate class even though a class for them already exists, why would we do that?

A

Recal

  • Well, if the rate for that particular asset is off, i.e. the asset actually depreciates faster, most likely you will see a terminal loss.
  • However, if there are other assets in that class - you will not be able to deduct
24
Q

Cumulative Eligible Capital

-What is CEC?

A

Cumulative Eligible Capital

-Any intangible capital proerty that is not deductible as CCA nor as expense in current year.

  • Example:
    1. Goodwill
    2. Customer List
    3. Trademarks, licences
    4. Incorporation expenses
    5. Appraisal cost for CEC
25
Q

Cumulative Eligible Capital

Terminology:

Capital Cost

UCC

Capital Cost Allowance

A

Cumulative Eligible Capital

Terminology:

Eligible Capital Expenditure

Cumulative Eligible Capital Balance

26
Q

Cumulative Eligible Capital

-Is CEC available for ALL types of income?

A

Cumulative Eligible Capital

-No, it is only available for Business Income, Unlike CCA that can be claimed for business, property and even employment income.

27
Q

Cumulative Eligible Capital

Additions

A

Cumulative Eligible Capital

-When Eligible capital property is acquired - 3/4 is cost is added to the CEC.

28
Q

Cumulative Eligible Capital

-Amortization

A

Cumulative Eligible Capital

  • Rate is 7%
  • No half year
  • Short Fiscal period still apply
29
Q

Cumulative Eligible Capital

Disposition

A

Cumulative Eligible Capital

-3/4 of the Proceeds are deducted from the CEC balance

ACCO643-Tax (3 decks)

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