ACTG3P41 - Chapter 5 - CCA for Depreciable Property PDF

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Chapter 5 – Capital Cost Allowance (CCA) – Depreciable

Capital Cost Allowance – POOL      

CCA Class is a pool of properties of specific types. Properties disposed during the year reduce the pool UCC CCA year Carrying Value = Net Book Value (NBV) Difference between NBV and UCC balances can result in future tax/liabilities

Types of Capital Property 1. Non-depreciable property (e.g land) – NON-ELIGIBLE for CCA. 2. Depreciable property (including intangibles) a. Due to CCA, recapture or terminal loss can also apply on disposition ITA 13(21) depreciable property ITA 39(1)(B) ???? ITA 20(1)(a) capital cost of property

Claims of CCA (max and min)  

Each year, the taxpayer may claim any amount of CCA from zero to the maximum allowable claim (rate). Sometimes beneficial claiming less than the maximum amount

Information Circulars: IC 84-1 Revision of capital cost allowance claims, perm deduct.

INSERT FORMULA (P.5008)

Available-for-use rule 

CCA claimed after its available for use. Building use is the earlier of: o When all or substantially all of the building is first used for its intended purpose o The second taxation year after the year of the acquisition

ITA 13(26) Restriction on deduction before available-for-use Also ITA 13(27)

Basic Rules 

The act disallows a deduction of the cost of capital property unless specifically allowed in the act

ITA 18(1)(B) capital outlay or loss ITR: 1100 capital cost allowance deductions allowed

Depreciable Property – MAIN EXCLUSIONS:      

Property, the cost of which is deductible in computing income Property that is described in inventory Property not acquired for the purpose of gaining or producing income Property that is a yacht, camp, lodge, golf course or facility for which expenses are not deductible by reason of paragraph 18(1)(l) Land Property situation outside Canada that is owned by non-residents

ITR 1102 Property not included

***CCA is generally used for self-employed person or business Employees and CCA 

CCA prohibits employees

Exception: 

Use item for perform employment duties and if: o Motor vehicle and aircraft o Musical instruments

Loophole: use leasing arrangement Paragraph 8(1)(f) ITA 8(2) General limitations ITA 8(1)(j) motor vehicle and aircraft ITA 8(1)(p) musical instrument cost

Common CCA Classes (P. 5020) - ATTACH PHOTO!

Sale of Assets – CCA classes (Recapture or Terminal Loss) 



Recapture CCA: occurs when balance in class of assets is negative after the disposition. The difference between 0 and the balance is the recaptured amount. The balance of UCC becomes 0. ITA 13(1) Recaptured depreciation Terminal Loss CCA: occurs if the balance in the class is positive BUT ALL of the assets in the class have been disposed. Set UCC balance to 0. The excess of 0 is terminal loss (deduction from income) ITA 20(16) Terminal loss

Eligibility for immediate expensing conditions 1. Must be an arm’s length CCPC 2. Purchased/into service (April 19, 2021 and Dec 31, 2023) 3. EXCLUDE: Class, 1-6, 14.1, 17, 47, 49 and 51

Accelerated Investment Incentive

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Alteration for first year deduction CCA (of use) (generally prescribed: 1.5 * net addition) Property must be available for use before 2028 (must be eligible property as well – generally NEW) For use through 2023 tax year Full expensing (100% CCA deduction): o For Class 43.1, Class 43.2 or Class 53 (man/process eq.) acquired after Nov 20,2018 o Class 54 or 55 acquired after March 15, 2019 o NOTE: Class 55 limited to $55,000

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Special rule Class 13/14 have special rules (added back 1.5 * CCA calculated) Class 12: 100% of property added to class is deducted as CCA

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FULL EXPENSING (100%) – Phase out map ***P.5027

Rules for (used) eligible property (BOTH CONDITIONS MET) o o

The property was not previously owned by the taxpayer or a non-arm’s length person AND The property was not transferred to the taxpayer via a tax-deferred “rollover method”

**If conditions not met. Non-eligible property will use the half-year rule

Non-arm’s length transactions and the half-year rule o

The half year rule does not apply to property acquired form a person NOT dealing at arm’s length if: o The property was depreciable property of the transferor AND: o The property was owned continuously by the transferor from the day (365 days or more before taxation year end of acquirer’s acquisition year)

*The failiure of this test allows non-eligible property to use half-year rule

Prior to Accelerated Investment Incentive:

Property NOT subject to half-year rule (property in Class 12 paragraphs (a) to (c), (e) to (k)) a) b) c) d) e) f) g) h) i)

book part of a lending library chinaware, cutlery, or other tableware a kitchen utensil costing LESS than $500 a medical or dental instrument costing LESS than $500 linen a tool costing LESS than $500 a uniform rental apparel or consume, including accessories rental apparel or costume, including accessories

o

Class 14: a patent, franchise, concession or licence for a limited period

Non-arm’s length transactions and the half-year rule o

The half year rule does not apply to property acquired form a person NOT dealing at arm’s length if: o The property was depreciable property of the transferor AND: o The property was owned continuously by the transferor from the day (365 days or more before taxation year end of acquirer’s acquisition year)

*The failiure of this test allows non-eligible property to use half-year rule

Taxation year less than 12 months (short taxation year):    

If a taxation year is less than 12 months, capital cost allowance must be prorated by the proportion of 365 to the number of days in the taxation year Eg) first and last year of business operating, year of change in fiscal period. Some corporations taxation years are defined by the fiscal period ITR 1100(3)

EXCEPTION to CCA proration:   

Class 14 asset Employee CCA for automobile FIRST YEAR only When property used to produce income (e.g rental income)

Ownership of Property 

CCA on depreciable property requires taxpayer EITHER: o Hold Title to the asset OR o Assume possession, use and risk

EXCEPTION to CCA ownership/deductibility:  

Class 13 (leasehold improvement) (improvements made by tenant but owner has title to improvement) Income tax folio S3-F4-C1 general discussion CCA

Disposition of Property *ITA: 248(1) disposition

Class 10.1 Automobiles 

 

Chapter 3 – Employees who use their own automobiles to earn employment income and who are entitled to following deductions: o Sales/negotiating persons expenses ITA(1)(F) o Travel expenses (other than motor vehicle) ITA 8(1)(h) o For motor vehicle expenses ITA 8(1)(h.1); ITA 8(1)(j) – aircraft version ARE (Above) entitled to deduct CCA on automobiles CCA is deductible up to prescribed limit, $30,000.

 

The maximum capitalized cost is: 30,000 + (13%) HST Class 10.1 is designed when automobile cost is greater than prescribed limit

SPECIAL RULES: IN ADDITION TO PRESCRIBED LIMIT: 1. No Recapture or Terminal Loss 2. Separate Class 10.1 for each automobile 3. CCA in year of disposition a. One-half of CCA allowed had it not been disposed of, may be deducted. Must be OWNED and disposed.

Class 10 Automobiles    

Must cost LESS than prescribed limit (30,000) Will be required to include recapture, or terminal loss EMPLOYEES required to include in employment income the amount of CCA subjected to RECAPTURE. (terminal loss prohibited for employees) Usual rules apply for Businesses

Separate Class Rule for Electronic Office Equipment ITR 1101 (5p) 

  

Taxpayer may elect to place Class 8 (exceptions) in a separate class. Items are: o Computer software (systems software control), monitor equipment and electronic communications control equipment o A photocopier (normally class 8) o Office equipment that IS electronic communications control equipment (phone, transmission) MUST have a capital cost of MINIMUM of $1000 Placed in separate Class 8 Asset. SPECIAL RULE: Requires the transfer of Class 8 assets of a separate class back to their main Class 8 asset after 4 Taxation years ITR 1103(2g)

Class 43 Assets (separate class)  

For assets costing more than $1000 After 5 taxation years, shifted back to general class ITR 1103(2g)

Transfer to another class – AVOID recapture 

Elections to make certain transfers ITR: 1103(2d)

Interest expenses (SKIP, discussed in property income section)

Capital Cost Reduction - for Cost Assistance (grant, subsidy etc.)  

When a grant, subsidy, forgivable loan from tax, investment allowance (or other) on acquisition of property, the amount of assistance REDUCES the capital cost (ACB/UCC) of the property. ITA 13(7.1)

Inducement payment: payments is an economic incentive to persuade person towards certain action Capital Cost Reduction - Inducement Payments: 

 

Capital cost reduced upon receiving inducement payment IF: o Taxpayer must make election to this NO LATER than tax deadline for the year they received payment o OR subsequent year if property acquired in subsequent year ITA 12(1)(X) Reduction cannot exceed the LEAST of: o Inducement amount o Capital cost o $0 (assuming disposed before year of reduction)

Straight-line methods (no declining)

Class 13 – Leasehold Improvements (straight) 

  

Claim AFTER first year deduction is the LESSER of: o 50% of capital cost leasehold interest o Capital cost divided by the number of 12 month periods from beg. Tax year to end. Lease term + 1st renewal term First year either half-rule or ACC depending on eligibility ITR 1100(1)(b) Implied formula suggest minimum 5 years to write-off unless lease not renewed

Class 14 Limited Life Intangibles (straight)  

Class 44 EXCEPTION allows taxpayer to include patents with limited period classified as Class 14. ITR 1103(2h) Election not to include properties class 44 Legal life of patent is 20 years



Generally, includes limited-life intangibles such as patents, franchises, concessions or licences.

Insurance Proceeds expended on Damaged Depreciable Property    

Insurance proceeds payable for damaged depreciable property spent to repair within year/reasonable time must be included in income Unused portion of proceeds treated as proceeds of disposition of depreciable property Used Portion the amount of proceeds is included in income as benefit, offset by the expensed amount ITA 12(1)(f)

Change from Income –producing TO other purpose   

Changing use of property from producing income to other (e.g residential), deems the disposal of the depreciable asset at FMV There is a deemed reacquision of asset at FMV, and establishes cost for personal use ITA 13(7)(A)

Change in Non-income producing to Income-producing purpose ...