ADMN 3710 taxation ch 6

Chapter 6: The Acquisition, Use, and Disposal of Depreciable Property

Overview of Depreciable Property

  • Depreciable Property: Assets that decline in value due to use, wear and tear, or obsolescence.

  • Capital Cost Allowance (CCA): A type of tax deduction businesses can take for the depreciation of eligible properties.

I. A Standardized System for Depreciable Property

  • Depreciation/Amortization:

    • Allocation of an asset's cost over its useful life.

    • Purpose: To match the asset's cost against the income it generates.

    • Requires estimates of:

      • Useful life

      • Salvage value

      • Contribution to business each year

  • Judgment in Estimation:

    • Similar businesses acquiring similar assets may arrive at different estimates.

    • This leads to variations in income reported for each year.

    • Total cost deducted remains constant but cannot exceed the original cost of the asset.

II. Depreciable Property and Capital Cost Allowance (CCA)

A. CCA Calculation

  • Steps to calculate CCA:

    • Start with the opening balance of undepreciated capital cost (UCC).

    • Add any additional purchases.

    • Deduct disposals.

    • Apply appropriate CCA rate to the resulting balance.

B. Eligibility for CCA

  • Individuals and corporations can claim CCA on:

    • Tangible assets (excluding land)

    • Intangible assets.

  • Eligibility Criteria:

    • Legal title of the asset required.

    • Asset must be available for generating income from business or investments.

C. Capital Cost Components

  • The capital cost includes:

    • Original purchase price

    • Additional costs to bring the asset to operational status.

D. Rates of CCA

  • Different classes for assets have specific maximum deductible rates.

  • Taxpayers can claim up to this amount; unclaimed portions carry over.

  • Pooling of Assets:

    • Same-class assets pooled together, affecting CCA claims on disposals and acquisitions.

    • Disposals reduce the pool by the lesser of cost or proceeds from sale.

III. Declining Balance Method

  • The CCA system primarily uses:

    • Declining Balance Method: A fixed percentage applied to the remaining UCC.

    • Each asset class has its specific rate.

  • Special Cases:

    • Classes such as Class 13 & 14 may have exceptions.

A. Limitations and Proration

  • CCA claims are prorated if the taxation year lasts less than 365 days.

  • All claims adhere to defined operational parameters.

IV. Common Declining Balance Classes

  • Class Designations and Rates:

    • Class 1 (4%): Buildings acquired after 1987.

    • Class 3 (5%): Buildings acquired before 1988.

    • Class 10 (30%): Vehicles and movable equipment.

    • Class 12 (100%): Small tools, software, etc.

    • Class 14 (5%): Unlimited life intangible assets (e.g., goodwill).

A. Special Treatments

  • Maximum addition and specific rates exist for specialized assets like vehicles and intangibles, altering how CCA can be calculated.

V. Gains and Losses on Disposal of Depreciable Property

  • Terminal Loss: When all assets are disposed of and the balance is positive, it can be written off.

  • Recapture: Applies when the pool shows a negative balance regardless of asset presence.

  • Capital Gains: Recognized when selling price exceeds original asset costs.

VI. Impact on Management Decisions

  • The tax treatment significantly influences decisions regarding:

    • Methods of amortization/depreciation chosen by businesses.

    • How capital costs and gains/losses are treated affects overall tax implications, impacting cash flow and capital expansion strategies.