Ch5: Capital Cost Allowance

Question 1

What is the tax system rule regarding depreciation?

Answer 1

• Tax system prohibits deduction of accounting depreciation/amortization.
• Tax system permits deduction of CCA.

Question 2

Terminology

Answer 2

Tax (accounting)
CCA (amortization/depreciation): actual depreciation
Capital cost (cost): cost of the asset
UCC (net book value): undepreciated capital cost —> what’s left to be depreciated

Question 3

What are the general tax rules regarding CCA?

Answer 3

1. Assets are grouped in classes: over 50 classes with various CCA rates, ranging from 4% to 100%.
2. CCA is claimed:
   - mostly on a declining balance basis (only 2 classes straight line)
   - maximum CCA allowed is specific for each class
   - no minimum CCA required, can claim up to the maximum allowed for that class
   - when you acquire an asset, for the first year you get a bump of 50%
   - you can only claim CCA if the asset is available for use
   - when you sell an asset, remove the lesser of the cost or POD of the asset

Question 4

What is the accelerated investment incentive (AccII)?

Answer 4

The Bump
- Applies to acquired depreciable assets (most depreciable assets are eligible)
- Adds 50% to the cost for the purposes of determining 1st year CCA
- CCA will be higher in year of acquisition
- CCA will be lower in subsequent years

Question 5

What are the eligible assets for the AccII?

Answer 5

Depreciable assets acquired after November 20, 2018 and available for use (no requirement that the asset be new).

Not eligible (not important):
- if previous CCA or terminal loss deduction claimed
- if previously owned by the taxpayer or a non-arm’s length person
- if acquired on a rollover basis

Question 6

What is recapture?

Answer 6

Recapture can occur when you sell an asset.
Whenever the class is negative at year end, the negative amount goes into income (recapture of CCA). Also have to add back to UCC class to restore the class to a nil balance (year 2 O/B = 0).
Only occurs if the negative balance is present at the end of the year.
Meaning: overdepreciated, overclaimed CCA over the years.
* what to do to prevent this? Buy an asset :)

Question 7

What is terminal loss?

Answer 7

Terminal loss can occur when you sell an asset.
Whenever the class is positive at year end AND no assets remaining, the positive amount is a reduction in income (fully deductible terminal loss of CCA). Also have to deduct from the UCC class to restore the class to a nil balance (year 2 O/B = 0).
Only if no assets left in the class at the end of the year.

Question 8

What is class 13?

Answer 8

Leasehold improvements
- straight line
- CCA claim 1st year: (amount of leasehold improvement x 1.5) / (lease term + first renewal option)
- limited to between minimum of 5 years and a maximum of 40 years (if you have a 50y lease, divide by 40y)
- each expenditure amortized separately
- 50% accelerated depreciation available in year of acquisition

Question 9

What is class 14?

Answer 9

Limited life intangibles: franchises, trademarks, and licenses. & patents with limited life go to class 44 unless you choose class 14.
- straight line over legal life
- prorate for year of acquisition and year it ends (the law: only asset you have to prorate)
- 50% accelerated depreciation available in year of acquisition
- CCA claim 1st year: (cost x 1.5) / (legal life x prorate for first year)
- correct way is to prorate by days

Question 10

What is class 44?

Answer 10

Patents with limited life
- 25% declining balance basis
- 50% accelerated depreciation available in year of acquisition
- can use to choose class 14 (useful if near end of patent’s life, also you have to tell the government. Reason: because class 14 is straight line, you would select class 14 if the life of the patent is 4 years or less in order to claim more CCA quicker).

Question 11

What is class 14.1?

Answer 11

Goodwill & unlimited life intangibles (franchise, patent, trademark, license)
- 5% declining balance basis
- 50% accelerated depreciation available in year of acquisition
- recapture and capital gains, but no terminal losses

Question 12

What are class 14.1 intangible assets other than goodwill?

Answer 12

• customer lists
• unlimited life franchises, trademarks, patents, licenses
• incorporation costs greater than $3,000 (up to $3,000 can be deducted against business income: 10k —> 3k deduction claim as expense, remaining 7k put in 14.1 additions)
• appraisal costs associated with intangible assets
• corporate reorganization costs
• cost of government rights
• some payments under non-competition agreements
• articles of amendments & reorganization costs (must all go to 14.1 additions)

Question 13

What is class 3?

Answer 13

Buildings acquired before 1988
- 5% declining balance basis

Question 14

What is class 1?

Answer 14

1. Buildings acquired after 1987 but before March 19, 2007
   - 4% declining balance basis
2. Buildings acquired after march 18, 2007
   - 50% accelerated depreciation available in year of acquisition
   - 4% DBB CCA if residential (any other)
   - 10% DBB CCA if more than 90% for manufacturing&production use, new buildings only (New AND M&P)
   - 6% DBB CCA if more than 90% for commercial use, new buildings only (New AND commercial)

Question 15

What is class 8?

Answer 15

Various machinery, equipment, and furniture e.g., office equipment
- 20% DBB
- 50% accelerated depreciation available in year of acquisition

Question 16

What is class 50?

Answer 16

Computer hardware and systems software
- 55% DBB
- 50% accelerated depreciation available in year of acquisition

Question 17

What is class 10?

Answer 17

Vehicles with cost of $36,000 or less and trucks (e.g., delivery trucks) any cost.
- 30% DBB
- 50% accelerated depreciation in year of acquisition

Question 18

What is class 10.1?

Answer 18

Vehicles with cost greater than $36,000, considered luxury vehicles, not trucks used for the business no matter their cost
- 30% DBB
- each vehicle goes into a separate class 10.1 at $36,000
- no recapture or no terminal loss allowed on the sale of the asset
- allowed half year’s CCA in year of disposition
- 50% accelerated depreciation available in year of acquisition

Question 19

What is class 12?

Answer 19

Tools costing less than $500, dental instruments, dishes, books
- 100% DBB

Computer software
- half year rule: 50% CCA allowed in first year and 50% in second year

• 50% accelerated depreciation NOT available in year of acquisition for class 12

Question 20

What is class 53?

Answer 20

Manufacturing and processing assets
- 50% DBB (acquisitions after December 31, 2015)
- 100% accelerated depreciation available in year of acquisition

Question 21

Explain CCA rule on short fiscal periods?

Answer 21

Short year: first and last year of business
- prorate CCA based on number of days

Question 22

Explain class 8 certain assets separate classes?

Answer 22

Photocopiers & telephone systems: can elect to put each in a separate class 8.

Why? When you sell one of the 2 assets, you can claim terminal loss in one of the class 8. If you put all assets in class 8, you will never get a terminal loss.

Question 23

What is the immediate expense rule for CCPCs?

Answer 23

CCPCs effective April 19, 2021 for classes 8, 10, 10.1, 12, 13, 14, 44, 50, 53, and 54 can expense the acquisition of those assets (up to $1.5M each taxation year shared amongst associated companies) instead of claiming CCA based on the CCA rules.
- the $1.5M is in total, you can choose any amount within those classes