Lec 7 Flashcards
Profitability
Revenues - Costs - Cost of Capital
Royalty-based taxation
Taxes levied on Revenues
Revenue - Op Ex - Taxes = Net Income AT
NI - Cap Ex = CF
Profit-based taxation
Taxes levied on Profits
Revenue - Op Ex = Net Income before allowances and taxes
NI BAT - Dep - other non-cash tax allowances = taxable income
TI - Taxes = NI_AT
Cash Flow formula
Cash Flow = Revenue - Operating Expenses - Taxes - Capital Expenditure
= Net Income + Depreciation + ONTA - Capital Expenditure
What is salvage value when depreciating for tax purposes
SV ignored
Recapture vs loss on disposal
Depreciation Recapture: If net salvage value* > undepreciated balance (book value), but does
not exceed purchase price, then difference is taxed
Loss on disposal: If net salvage value < undepreciated balance, then difference is
allowed as deduction for loss
Net Salvage Value
Net Salvage Value: Sales price - Dismantling and transport costs
Class 1, 10 and 24
Class 1 DBD @ 4 % – Brick and/or cement buildings
Class 10 DBD @ 30 % – Mobile equipment
Class 24 SL @ 50 % – Pollution control equipment
Capital gain
Sale of a depreciable or non-depreciable asset for more than its purchase price
- In Canada, 50% of a capital gain is taxable
Capital Loss
Sale of a non-depreciable asset for less than its purchase price
- Capital losses can only be used to offset capital gains
- In Canada, capital losses can be carried backwards for up to three years, and forwards indefinitely
What does capital tax factor represent
CTF = After-Tax Cost / Cost of Asset
CTF = (Cost of Asset – PV of Tax Savings) /Cost of Asset
CTF = 1 – PV of Tax Savings /Cost of Asset
Q: What is UCC in the Canadian tax system?
A: UCC (Undepreciated Capital Cost) is the tax book value of an asset, reduced annually by the Capital Cost Allowance (CCA).
Q: What happens when SV > UCC?
A: This results in recapture of CCA — the over-claimed depreciation is added back as income and taxed fully.
RecaptureTax=(SV−UCC)×t
What happens when SV < UCC?
A: This results in a terminal loss, meaning you didn’t depreciate the asset enough. The loss is deductible and provides a tax saving.
TaxSaving=(UCC−SV)×t
Q: What happens when SV > original cost (I₀)?
A: Two tax consequences:
Recapture up to original cost
Capital gain for the portion above I₀, taxed at 50%
CapitalGainTax=0.5×(SV−IC)×t
Is the half-year rule applied to Salvage Value?
A: No — the half-year rule only applies to acquisitions, not disposals.
What is Working Capital (WC) in project evaluation?
A: WC is the cash tied up to cover short-term needs like inventory and receivables. It is not depreciated and is included as a capital cost at the start of production.
WC is added as an outflow at the end of the preproduction period, right before revenues begin.
Recovered at the end of project (Note that working capital is non-depreciable and therefore, non-taxable when recovered at the end of the project’s
life.)
How are depreciable assets treated at the end of the project if not fully depreciated?
A: Their remaining Undepreciated Capital Cost (UCC) is treated as a salvage value or recovery, which appears as an inflow in the final year.
What are the after tax proceeds
Selling price - capital gains tax payed (no tvm)
Before tax CF vs AT CF
Before-tax CASH FLOW = Operating Profits - Capital Expenditures
After-tax CASH FLOW = Operating Profits - Income Taxes - Capital Expenditures
Loss Carry Forward rules
Canada: loss carried forward for 7 years (can reduce taxable income)
Carried backwards up to 3 years
What are asset pools in Canadian tax?
Groups of similar assets (same CCA class) combined for depreciation using declining balance method.
What depreciation method is used in asset pools?
Declining-balance depreciation.
Are assets in pools depreciated individually?
No, only the pool is depreciated as a whole.
How is CCA (Capital Cost Allowance) calculated?
CCA = Rate × Undepreciated Capital Cost (UCC) of the pool at year-end.
What happens when you sell an asset in a pool?
The sale proceeds (net of disposal costs) are subtracted from the pool balance.
What is recapture?
If the sale price of an asset is more than the remaining UCC, the excess is taxed as income (recapture).
What is a terminal loss?
If all assets are sold and the pool has a positive balance left, that amount is a deductible loss (terminal loss).
Can a pool balance be negative?
No. If a sale causes the pool to go negative, that amount is recaptured, and the pool is set to zero.
What if you sell an asset for more than you paid?
Only the original cost can be deducted from the pool. Any excess over the purchase price is a capital gain.
What if you sell an asset for less than its book value?
No adjustment needed in pool system; this is built into the CCA system. Remaining pool may become terminal loss if it’s the last asset.
Are SLD assets pooled?
No. Straight-Line Depreciation assets are not pooled; each one is tracked and depreciated separately.
How is depreciation calculated in SLD?
(Cost − Salvage Value) / Useful Life — same amount each year.
How do you treat asset sales under SLD?
Calculate gain or loss by comparing book value to sale price; adjust accounting records accordingly.
What happens to pool balance each year?
It’s reduced by the CCA claimed, and adjusted for asset purchases and dispositions. Remaining balance carries forward.
Can you claim more CCA than the pool balance?
No — CCA can’t exceed the current pool balance.
What triggers a terminal loss?
When the last asset in a pool is sold and a positive balance remains.
What triggers recapture?
When the proceeds from selling an asset are greater than the UCC of the pool — taxable as ordinary income.
What are the cases for SV vs UCC
Can you use factors for non integrated company
no
Capital gains vs capital gains tax
if building and land
Capital gains is on depreciable and non-depreciable items
Capital gains = Selling price dep items - purchase price dep items
Capital gains tax = %CG taxable * CG * t
When can does HYR not apply when doing UCC calculations
HYR applies to net acquisitions (acquisitions - sale of assets)
It does not apply if your net acquisitions are negative (more sales than acqui)
It does not apply to previous UCC (only new net acqui)
If you have sales and there is a capital cost of sold assets vs a price at disposition, subtract from net assets the lowest value from the two
When they say to determine cashflows on an after-tax basis using SLD but don’t provide a rate, what do you do?
SLD for tax purposes.
ie r = 1/N
DC = (IV)*r
