Lesson 6

Question 0

Define undepreciated capital cost and give a numeric example

Answer 0

The amount of an asset that has not been depreciated for tax purposes

10,000,000 factory
CCA = 4%
CCA= 400,000

Question 1

Define capital loss and give a numerical example

Answer 1

When an asset is sold for less than it cost to purchase
Purchase price = 1,000,000
Sell Price = 500,000
Capital loss = 500,000

Question 2

Define terminal loss and give a numeric example

Answer 2

When the last asset in the asset class is sold and the asset class has a positive balance, the balance is treated as a loss for tax purposes (terminal loss) 
Purchase price of 1,000,000
CCA = 4% = 400,000
Sale price = 9,200,000
Terminal loss = 400,000

Question 3

Define capital gain and give a numeric example

Answer 3

When an asset is sold for more than its initial cost - the difference between sale price and the initial cost (capital gain)
Purchase price = 1,000
Sale price = 1,500
Capital gain = 500

Question 4

Define CCA recapture and give a numeric example

Answer 4

When the sale of an asset would result in an asset class with a neg balance, the amount of the beg balance is the CCA recapture and is included in taxable income. The UCC is set to 0. 
Building initial cost = 10,000
UCC after 3 years of CCA = 5,000
Sale price = 7,000
= CCA recapture of 2,000 = taxable income

Question 5

Describe the optimum holding period in a perfect market:

Answer 5

In a perfect market an investor can’t outperform the market there is no optimal holding period

Question 6

What is the optimal holding period with transaction costs

Answer 6

To maximize returns an investor must minimize transaction costs therefore the investor should hold on to the property as long as possible.
Optimal holding period would be the assets economic life

Question 7

Describe the optimal holding period for debt financing

Answer 7

The longer the investment is held the higher the equity share of the investment is.
The optimal holding period is the economic life of the asset

Question 8

What is the optimal holding period for a real estate investment with s straight line CCA

Answer 8

Because the tax benefit for the asset will not change, time won’t affect the investment
The optimal holding period is the assets age life

Question 9

Define the optimal holding period for an investment with an accelerated CCA

Answer 9

Accelerated CCA won’t affect holding period - assets age life