Test Questions Flashcards
Basic rules of CCA system
Basic Rules of Capital Cost Allowance system
The basic rules of the capital cost allowance system can be stated for many classes quite simply as follows:
- Whenever an asset of a particular class is purchased, the full purchase cost (capital cost) is added to the balance known as undepreciated capital cost (UCC) of the class of assets;
- Whenever an asset of a particular class is sold, the full proceeds of disposition, not in excess of original cost (i.e., the lesser of proceeds and capital cost (LOCP)), is subtracted from the balance in the class of assets (proceeds in excess of capital cost may give rise to a capital gain); and
- c) At the end of the taxation year,
- If the balance in the class of assets (i.e., UCC) is positive and there are still assets in that class,
- Subtract from the balance in the account ½ of the excess, if any, of purchases minus disposals made in the year (i.e., ½ x (a – b), above),
- Deduct up to the maximum capital cost allowance (CCA) at the prescribed rate for the class on the positive balance, and
- Add back the ½ of the net amount subtracted in (A), above;
- If the balance in the class of assets is negative, take the negative balance into income as recaptured capital cost allowance and set the balance in the class at zero; and
- If the balance in the class of assets is positive, but all of the assets in the class have been disposed of such that there are no more assets physically in the class, take the positive balance, known as a terminal loss, as a deduction from income and set the balance in the class at zero.
- If the balance in the class of assets (i.e., UCC) is positive and there are still assets in that class,
CCA for Buildings: Class 1 or Class 1-NRB?
The rate for Class 1 is 4% but for buildings acquired after March 19, 2007:
- if the use is at least 90% for manufacturing or processing, Class 1-NRB 10% is available
- for other non-residential buildings, Class 1-NRB 6% is available
CCA Method for Class 14 limited-life intangibles
Straight-line CCA is used for items in Class 14 which generally include limited-life intangibles such as patents, franshises, concessions or licences.
- The capital cost of each property is prorated over the number of days in the remaining life of the Class 14 asset.
- Note: Class 14 is not affected by the half-year rule.
Patents:
- Legal life:
- 20 years if registered after 1989
- 17 years if registered before 1990
- must be in Class 44 (25% declining balance) unless taxparer elects to move it to Class 14. This is usually done if the patent is acquired late in its life so that CCA would be higher in Class 14 than in Class 44 with 25% declining balance
CCA method for Leasehold Improvements
Straight-line method is used for Leasehold improvements.
CCA calculation for leasehold interest (Class 13) for a year other than the first year :
The lesser of:
- 1/5 of the capital cost of the leasehold interest; and
- capital cost divided by the number of 12-month periods from the beginning of the taxation year in which the cost was incurred to the end of the term of the lease plus the first renewal term not to exceed 40 years
The first year write-off would be 1/2 of the above amount to provide the equivalent of the half-year rule.
The last year’s write-off would also be 1/2.
e.g. For an annual CCA of $2,000 for a total period of 8 years the CCA would be:
Year 1 1/2 x $2,000 = $1,000
Year 2 to 8 7 x $2,000 = $14,000
Year 9 1/2 x $2,000 = $1,000
The total CCA of $16,000 = 8 periods x $2,000
CCA Method for Manufacturing and Processing Machinery and Equipment
If acquired after March 19, 2007 and before 2014, the asset is added to Class 29 where:
- CCA rate is 50%
- using straight-line method on each asset
- half-year rule applies
Note:
- The CCA 50% is calculated on the purchase cost of the asset not on the UCC.
- The half-year rule effectively changes the CCA rate to 25% from 50% in the year of acquisition.
- When the UCC is less that 50% of the cost of the asset, the CCA will be 100% of the UCC of the asset.
Classification of computer equipment
After Mar 22, 2004 and before Mar 19, 2007:
- Class 45
- Rate: 45%
- Half-year rule: Yes
On or after Mar 19, 2007:
- Class 50
- Rate 55%
- Half-year rule: Yes
On or after Jan 28, 2009 and before Feb, 2011:
- Class 52
- Rate 100%
- Half-year rule: NO
Common Property Not Affected by Half-Year Rule
- a book that is part of a lending library
- chinaware, cutlery, or other tableware
- a kitchen utensil costing less than $500 (less than $220 if purchased before May 2, 2006)
- a medical or dental instrument costing less than $200
- linen
- a tool costing less than $500
- a uniform
- rental apparel or costume, including accessories
- a patent, franchise, concession or licence for a limited period
Election to capitalize interest expense
- Used when there is in insufficient taxable income to use the interest deduction
- The interest may be added to the capital cost of the acquired depreciable property instead of being claimed as a current year deduction
- This election also exists for interest incurred in connection with many natural resource exploration and development properties.
- Interest and other expenditures incurred in construction, renovation, or alteration of building is are capitalized until the building is complete and, consequently, are not eligible for this election.
List the options for treating:
Expenses of representation to obtain a patent or franchise
- CRA suggests deducting the cost immediately (subject to recapture);
- Deduct the cost over a ten-year period; or
- capitalization of the cost in the appropriate CCA class (14 or 44) or in the eligible capital property pool.
List the Exceptions to the Declining Method of CCA
- Leasehold improvements (Class 13), half-year rule applies.
- Class 14 limited-life intangibles, no half-year rule
- Class 29 for manufacturing & processing equipment uses the 50% straight-line method. 1/2 year rule applies
When does the half-year rule not apply?
The half-year rule does not apply to property acquired from a person not dealing at arm’s length with the acquirer if:
- the property was depreciable property of the transferor; and
- the transferor owned the property continuously from a day that was at least 365 days before the taxation year-end of the acquirer in the year of acquistion to the date of acquistion
When must capital cost allowance be prorated?
Capital cost allowance proration is required for a short taxation year:
- in the first or last years of the operation of a business
- in a year in which there has been a change in fiscal year
Exceptions to short-year rule:
- Class 14 properties (patents, franshise, concession or licence for a limited period). Instead, the proration is based on the number of days in the year that the asset is owned.
- An employee’s first year of use for employment purposes of an existing car. (Half-year rule applies to purchase of a new automobile)
- Where depreciable capital property is used by an individual to earn income from a source that is property (e.g. rental icome), rather than busines, the full calendar year is considered to be the taxation year of the individual and, therefore, no prorating is necessary.
ECE System
- There is only one pool for all unlimited intangible properties (including goodwill)
- The CEC account is amortized on a declining basis to a maximum of 7% of balance in account.
- Add only 3/4 of ECE and deduct only 3/4 of proceeds (ECA)
- There is no half-year rule
At the end of each year, if the balance of CEC is
(a) positive and business continues:
* take CECA to maximum of 7% of the balance of CEC
(b) negative, for any taxation year after Oct. 17, 2000:, take into income:
- lesser of
- the negative balance, and
- all CECA less recaptured amounts
PLUS
2. 2/3 x (neg. bal minus amt. from one above) (c) positive, but business has been terminated, take the positive balance as a deduction from income (equivalent) to terminal loss)
(e)
Class 10.1 Automobiles
- This is a separate class for automobiles having a cost in excess of $30,000 plus HST
- The rules relating to recapture of capital cost allowance and terminal loss do not apply to automobiles having a cost in excess of $30,000 plus HST.
- Instead of terminal loss there is a special capital cost allowance calculation for the year of disposition:
- 1/2 the CCA that would have been allowed if the automobile has not been disposed of may be deducted.
- To qualify for this special “half-year rule”, the automobile must have been owned by the taxpayer at the end of the preceding year.
Class 10 Automobiles
- For automobiles costing less than the prescribed limit.
- The amount of capital cost allowance claimed is subject to recapture.
- Terminal loss on disposition is not allowed for employees.
- The usual rules for deducting capital cost allowance, subject to the half-year rule, inlcuding recapture, or deducting a terminal loss apply to an automobile used in a business by and owned by a proprietor,a partner, or a corporation.
