Capital Cost Allowance

Notes for CGA  Taxation 1 exam – Capital Cost Allowances (CCA)

General

CCA has to be claimed based on categories. Tax payer may claim any amount of CCA from Zero to maximum allowable claim. Properties that not acquired for producing income and property outside Canada owned by Non-Resident are excluded from eligibility of claiming CCA. Employees are allowed to claim CCA only for three types of  properties ie., Motor Vehicle, Air Craft and musical instrument when these properties were used to perform employment duties. CCA under tax accounting is based on useful life, legal life or fiscal policy whereas under financial accounting it based on useful life or principle of consistency.
Categories of Capital Property
  1. Non-depreciable property
    • These capital properties are not eligible for CCA. Land, Investments, Personal-use Property, Listed Personal property and Receivables are examples of this category
  2. Depreciable property
    • Eligible to claim CCA based on declining balance method. Every asset has to be grouped into one of prescribed classes specified in Income Tax Act. Specific rates are prescribed for each class.
  3. Eligible capital property
    • Eligible to claim CCA at 7% of cumulative eligible capital amount (CECA). 75% of cost of eligible capital expenditures have to be pooled into cumulative eligible capital and CCA is to be claimed based on this amount. Goodwill, unlimited life franchises and incorporation costs.
In general, CCA system is based on declining balance method except Class 13,14 and 29 assets where straight line method is followed
Method of calculating CCA  for depreciable capital property

Undepreciated capital cost of the class at the beginning of the year . . . . . . . . . . . $ xxx
Add: purchases during the year  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ xxx
$ xxx

Deduct: dispositions during the year at the lesser of (LOCP):

(a) capital cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ xxx
(b) proceeds of disposition  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ xxx (xxx)

Undepreciated capital cost before adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ xxx

Deduct: 1/2 net amount * . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (xxx)

Undepreciated capital cost before CCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ xxx

Deduct: capital cost allowance in the class for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . (xxx)

Add: 1/2 net amount * . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxx

Undepreciated capital cost of the class at the beginning of the following year . . . . . . . . . .           $ xxx

* Purchases during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ xxx

Deduct: lesser of capital cost and proceeds of disposition above . . . . . . . . . (xxx)

Net amount (positive amounts only) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ xxx

HALF YEAR RULE

Half Year Rule is applicable for property in Class 12, 14, 15 and 23

Class 12 – Books of lending library, Chinaware, cutlery, kitchen utensils costing less than $200, linen, medical or dental instrument costing less than $200, tools costing less than $200, uniform, rental apparel

Class 14 – Patent, Franchise for a limited period

Class 15 – Woods assets

Half Year rule is not applicable for non-arm length transactions including corporate reorganisation except that was acquired less than 365 days

AVAILABLE FOR USE

Tax payer cannot start claiming CCA until property become available for use

It is available for use when it is delivered and capable of performing the functions for which it was acquired

In case of building, it is available for use at the earlier of

i) first used for intended purpose and

ii) second taxation year after the year of acquisition

TAXATION YEAR LESS THAN 12 MONTHS (SHORT TAXATION YEAR)

CCA must be prorated by the proportion that the number of days is of 365

Half year rule adjustment must be made, exception to Class 14 assets

For employee – Pro rata not applicable for automobile in the first year of use of an existing car, although half year rule is applicable in case of new automobile

Individual using property to produce income from a source that is property, no prorating is necessary. It is considered as full calendar year

OWNERSHIP OF PROPERTY

Tax payer must be owner to claim CCA, except in Class 13 leasehold improvements / interest

Cost incurred for capital assets in which either ownership / leasehold interest does not exist, it comes under eligible capital expenditure category

DISPOSITION

Disposition includes any event that is considered to be disposition without any proceeds.

Stolen, destroyed, confiscated without compensation, lost or abandoned without recovery

No claim of CCA in the year of disposition

If proceeds >UCC

Proceeds – UCC = recapture value

If proceeds <UCC and if there are no assets remaining in the class

UCC – Proceeds = Terminal Loss

If proceeds <UCC and if there are assets remaining in the class

No terminal loss

CLASS 10.1 AUTOMOBILES

Capital cost used as the basis for CCA claim is limited to $ 30,000 plus GST and provincial Sales Tax ( acquisitions after 2000 )

It is applicable whether employed or self employed and whether incorporated or unincorporated

In case of GST registered companies, GST is excluded

Each automobile must be placed in a separate class 10.1 and not pooled

Terminal loss rule does not apply. However one-half of CCA would be allowed

Employee - Terminal loss rule does not apply.

- CCA deducted from employment income

Other than employee – Half year rule, normal CCA rule and terminal loss apply

Separate Class rule for electronic office equipment

Properties, normally classified in Class 8 or 10 & capital cost of atleast $ 1,000 may be placed separately in Class 45 or Class 50 or Class 52

If these assets have not been disposed of after four year period from the end of taxation year, terminal loss deduction is not allowed

Class 45 – Acquired after 22 Mar 04 and before 19 Mar 07 – 45%

Class 50 – Acquired on or after 19 Mar 07 – 50%

Class 52 – Acquired on or after 28 Jan 09 and before feb 2011 – 100%

Transfer to another class

Some assets are classified under different classed because of change in the government policies regarding applicable classes

UCC of old property may be transferred to new class immediately before the disposition, thus recapture of CCA be avoided.

Interest expenses

Tax payer may elect to capitalize the interest expenses incurred for acquisition of depreciable property. If taxpayer ceases to add the borrowing cost in the taxation year, the election will not be available in subsequent years.

Subsidy, ITCs, Induced payments

Subsidies, allowances received be reduced the capital cost.

ITCs reduce the capital cost. However credit reduces UCC in the year following taxation year. GST input tax will reduce UCC before CCA is determined

Inducement payments may also be reduced the capital cost. Tax payer must make election.

Reduction amount cannot exceed i) the amount received or ii) capital cost of property

LEASEHOLD IMPROVEMENTS

Straight line basis & Half year rule applies

CCA claim is LESSER of i) 1/5th capital cost

ii) Capital cost divided by lease term in years + first renew term ( not exceeding 40 years )

Eg., Capital cost – 16,000 lease for five years with 2 renewable options of 3 years each.

i) 16,000/5 = 3,200

ii) 16,000 / 5+3 = 2,000 and CCA is 2,000

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