Chapter Five - ACCO 440 NOTES PDF

Preview

Summary

ACCO 440 NOTES...

Description

QUIZ ONE – 10% SEPTEMBER 24TH, 2020

Chapter Five: Capital Cost Allowance (CCA) Tax Term Capital Cost Capital Cost Allowance (CCA) Undepreciated Capital Cost (UCC)

Accounting Term Acquisition Cost Amortization Net Book Value (NBV or Carrying Value)

Capital Costs: include freight, installation costs, duties, non-refundable taxes, legal, accounting, appraisal, engineering, interest on funds borrowed to acquire the assets, and other fees. DOES NOT include refundable taxes and government grants. Rules for taking CCA. » CCA cannot be taken on non-depreciable assets; e.g.: land, receivables, inventory, PUP (Personal Use Property), investments.  Why can’t CCA be taken for inventory? The inventory was already written off as an expense. » Individual must be a taxpayer in order to take CCA and a Canadian Resident. » In order for the taxpayer to claim CCA, the asset must be owned by the individual at the end of the year – must be a capital asset; income producing. » Asset must be assigned to the appropriate CCA Class. When should a company claim LESS than max CCA?   

When the company is experiencing losses If anticipated sale of assets does not want to create recapture If there is a pending acquisition of control in which losses are restricted.

Current Expense: will return the asset to its previous state. Capital Expense: offers improvement to the assets previous state. Determinant of CCA value is the date the acquisition was ACQUIRED, not the current year. METHOD Half-Year Rule ACC II

RULE For assets acquired BEFORE November 21st, 2018 For assets acquired AFTER November 20th, 2018

Accelerated Investment Incentive

Short Fiscal Period

Will only usually occur in the year of a commencement or termination. In these cases, CCA may be prorated.

Short Taxation Year Rule (365 days).

Otherwise, never prorate CCA based on the number of days the asset has been owned – other than for exceptions such as Class 14 allows CCA prorated on daily usage.

Dispositions Recapture: If there is a negative UCC balance, there is a recapture income which is included in income even if there are other assets. Terminal Loss: if all the assets of the class are disposed and there is a positive remaining balance, a terminal loss which may be deducted from income.

Assets Non-Eligible for ACC II   

Previously owned by taxpayer Previously owned by a non-arm’s length (related) person Acquired on a rollover basis (transfer to an individual from a corporation or vice versa).

When can you start to take CCA on an asset? When is an asset available for use? The date you first use it to earn income The 2nd tax year after the year you acquire the asset The time just before you dispose of the asset The time the property is delivered or made available to you and is capable of producing a saleable product or service. » A building usually becomes available for use on the earlier of the following in addition to the above:  On the date you start using 90% or more of the building in your business  The date you complete the construction, renovation, or alteration » » » »

Election to classify items in different classes can be useful in accelerating the recognition of a terminal loss.

Declining Balance Class: CCA for the year CY = UCC Balance for CY * Prescribed Class Rate Straight-Line Balance Class: CCA for year CY = (Original Capital Cost/5) * Prescribed Class Rate

CLASS 1

CLASS 3

CCA CLASSES. Buildings, Railroads, Canals, Bridges, Tunnels, and Subways acquired AFTER 1987.  4% declining base rate Elections:  Buildings used at least 90% for manufacturing and processing acquired on or after March 19, 2007. (4% + 6% = 10%)  Other Non-residential buildings of at least 90% acquired on or after March 19, 2007. (4% + 2% = 6%) Buildings Acquired Pre-1988  5% Declining Balance HYR (Half Year Review)

This class includes docks, windmills, jetties, breakwaters, telephone poles, trestles or wharfs. Various Machinery, Equipment, and Furniture  20% declining balance  If acquired before November 21, 2018 – HALF YEAR RULE METHOD  If acquired after November 20, 2018 – ACC II METHOD Vehicles  30% declining balance  Common items are: motor, passenger vehicles (other than Class 10.1 – being less 30,000), automotive, equipment, trailers, wagons, computers, and system software acquired before March 22nd , 2008. 

CLASS 8

CLASS 10

CLASS 10.1 Luxury Cars     

CLASS 12

CLASS 13

30% declining balance Established for passenger vehicles with a cost in excess of an amount prescribed in which is $30,000 (PLUS GST AND PST). No recapture – ever. No terminal loss – ever. In the year of disposition, take 15% of beginning UCC and deduct from income.

A passenger vehicle is defined as a vehicle primarily for carrying passengers on highways and streets, with a cost in excess of $30,000. Computer Software (Not System Software – Class 50) and Small Assets (100%)  Compete write off in the year of purchase. Therefore, ACC II not applicable to Class 12.  The Half-Year Rule will apply to assets not included in the following: » A book that is a part of a lending library » Motion picture films and videotapes » Dies and Jigs » Chinaware, cutler, or other tableware » A kitchen utensil costing less than $500 » A medical or dental instrument costing less than $500 (g) linen » A tool costing less than $500 » A uniform » Rental apparel or costume, including accessories. Leasehold Improvements (Straight-Line)  Generally, the use of ACC II for this class and not the half-year rule – Straight over at least five years.  Capital Improvement (Class 1): improvement made by the landlord  For each improvement/expenditure, the maximum deduction will be the lesser of: » 1/5 of the capital cost of the improvement – If FIRST YEAR, multiply by ½ » The capital cost of the lease improvement, divided by the remaining lease term (including the first renewal option but not the second option, if any up to 40 years) and If FIRST YEAR, multiply by ½ » ACC II is 150% of CCA in the initial year of use

CLASS 14

CLASS 14.1

CLASS 29 CLASS 43

CLASS 44

CLASS 50

CLASS 53

CLASS 54 & 55

Limited Life intangibles – Straight Line  Since NO HALF-YEAR RULES; we can pro-rate based on the number of days the asset has been owned.  Limited life patents of less than 4 years are better off here. Goodwill and Other intangibles added after December 31st, 2016  5% Declining balance  E.g.: customer lists, unlimited franchises, trademarks, patents, licenses, incorporation costs greater than 3,000 – if less than 3,000 it is a current expense; appraisal costs (a specific category of quality control costs; companies pay appraisal costs as part of the quality control process to ensure that their products/services meet customer expectations and regulatory requirements), corporate reorganizations costs, costs of government rights, some non-compete agreements » Will be added to a new CCA class with a 5% declining balance rate. Manufacturing and Processing Assets acquired after March 18th, 2007 and before 2016.  50% Straight Line half-year rule Manufacturing and Processing Assets acquired before March 19, 2007  30% Declining Balance HYR.  Manufacturing and processing assets purchased for $1,000 or more can be allocated to a separate Class 43. Patents  25% Declining balance  Limited life patents of at least 4 years are better off here. Computer Hardware and Systems software acquired after January 31, 2011  55% Declining Balance  Includes smartphones and tablets. Manufacturing and Processing Assets after 2015/starting in 2016  If acquired before November 21, 2018 – half-year rule method  If acquired after November 20, 2018 – ACC II method but at 100% rather than 50%. » Meaning with ACC II adding 100% to CCA base (instead of 50%), 100% write-off in the year of acquisition. Zero Emission Vehicles  Class 54 for vehicles that were in Classes 10 and 10.1  Disposition recapture (if Capital Cost is greater than $55,000) = Deemed POD * (55,000/Actual Amount Paid)  Class 55 for vehicles that were in Class 16 – taxis.  If acquired after March 19, 2019 and a zero-emission vehicle, class 54 with 100% write off in the year of acquisition on the first $55,000.

The following assets should be placed in separate classes:  

Each Business – for each business reported by the taxpayer, separate classes must be kept. Rental Properties - rental properties costing more than $50,000 are placed in their own separate class.

 

Luxury Cars – passenger vehicles included in Class 10.1 – costing in excess of $30,000 Elections – buildings, computers, individual photocopiers, fax machines, and pieces of telephone equipment purchased for $1,000 or more.

Methodology 1. Identify current expenses or items such as: inventory, land, non-depreciable assets or which there is an override (e.g.: landscaping) in which CCA cannot be claimed. 2. Determine whether if item is available for use rules. 3. Determine which asset belongs to which class, the rate associated with each class, the proper determination/calculation of CCA, recapture and terminal losses. 4. Determine those classes that have a particular treatment or elections available (1, 8, 10.1, 12, 13, 14, 29) and calculate proper CCA.

Fundamentals of the CCA System and the Basic Rules Undepreciated Capital Cost: similar to the concepts of net book value of an asset for accounting purposes. The UCC amount for each class represents the cost of capital assets in that class, which has not yet been depreciated (the portion which has not been deducted) for tax purposes. Therefore, you can calculate the CCA deduction for a taxation year by applying the CCA rate for each class to the applicable UCC balance(s) at the beginning of the year. This process is followed unless there are additions or dispositions that affect the UCC balance available for the CCA deduction. Additions to a Class: two important rules apply in the recording of additions to any class: 1. Recording additions at their cost. This includes the invoice cost plus all costs incurred to have the asset delivered, in-stalled and ready for use. The amount is referred to as the capital cost. 2. The “available for use” rule. This indicates that an asset can only be recorded as an addition to the appropriate class if the asset is available for use, which generally means that the asset is ready to be used for its intended purpose. For example, a proprietor orders a new piece of equipment, which has to be installed on a concrete block before it can be used in the business operations. In this case, the proprietor cannot record an addition at the date of placing the order or the date of receiving the equipment in the warehouse. Instead, it can only be recorded as an addition on the date the equipment is installed on the concrete block and is ready for use in the business’ operations. Dispositions from a Class: a disposition can occur when an asset is sold, traded-in, or destroyed in an accident. The amount received on the sale of the asset, the trade-in, or perhaps, the amount received from the insurance company after an accident is referred to as the proceeds of disposition. A very important rule applies to the recording of a disposition of an asset from a class: all dispositions must be recorded at the lesser of: 1. Cost (Capital cost of the asset disposed of) 2. Proceeds of disposition.

CHECK YOUR UNDERSTANDING 1. A company is changing its business operations and therefore sells most of its assets in Class 8. However, it continues to hold some Class 8 assets. The disposition results in a credit UCC balance in Class 8. Which of the following statements is correct? The credit balance represents recapture of CCA and is included in the company’s business income in the current year. 2. How should the sale of a depreciable capital asset be recorded in the CCA system in Canada? Lesser of the cost or proceeds of dispositions. 3. A sole proprietor business is changing its operations and sells all of its assets in Class 12. After the disposition is recorded, there is a debit UCC balance in Class 12. Which of the following statements is correct? The debit balance is a terminal loss and is reported as a business deduction in the year.  A debit UCC balance indicates that the full capital cost of assets in that class has not been written off or claimed as a CCA deduction, even though there are no longer any assets of that class on hand. This is reported as a terminal loss, which is a business deduction.

ACCO 440: Tutorial Chapter Five: CCA  CCA is related to depreciable property.  Under CCA, the depreciable property is grouped into classes or different groups of assets to facilitate deduction regulations.  The asset must be used to generate either property or business income. To claim CCA, it must be a capital asset.  e.g.: distinguish between a drill used to manufacture an item versus a drill sitting in inventory.  The asset itself has to be used to generate income. Determination of Amounts:  There are multiple regulations with regards to the capital cost of an item:  Ownership  Capitalization of Interest: Borrowed – Added per ITA 21; interest paid on the loan can be capitalized.  Government Assistance: Grants = Deducted per ITA 13  Refundable Taxes: CCA is pre-tax. Expense or Improvement  When a business owns assets with extended useful lives, it is likely that over the lives of these types of assets the enterprise will incur additional costs.  Should these costs be deducted as a current expenditure or should they be considered an addition to the capital asset? ITA bases the answer on these three questions:  Does the expense provide lasting benefit?  Does the expense maintain or improve the property?  Is the expense for a part of the property or is it a separate asset? Available for Use Rules  CCA is deferred to the earliest of:  When the property is first used for earing income  The second taxation year in which it was acquired  For Buildings: deduct CCA when substantially all (90% or more) of the building is used for its main purpose.  For Public Corporations: deduct CCA when amortization is first recorded on the property.  For Motor Vehicles: when certificates and licenses are obtained. Half-Year Rule  Prior to November 21, 2018, most CCA classes were subject to this rule. Simply put, CCA for asses in the year of acquisition was restricted to half. The government cannot realistically track every single person, to determine on which day they purchased an asset. So, by virtue of not having time, under the HYR it was automatically assumed that you purchased the asset halfway through the year.  Got half the CCA when you got the asset.

ACCII

To encourage investments in capital assets, the half-year rule was replaced with the ACCII. Under this program, you can get an additional 50% CCA claim for assets in the year they were acquired.  CCA is a tax deduction; lowers your income; lets you pay less taxes.  Adding 50% in the year of acquiring the asset – to incentivize the business to purchase more assets; put more money in the economy. Short-Fiscal Periods  In the first or last year of operations of a business, a taxation year with less than 365 days may occur.  Under these circumstances, the maximum CCA deduction for most classes may be calculated using a proration based on the relationship between the days in the actual fiscal year and 365 days.  Example: ABC Corporation’s taxation year ends on December 31, 2014. It begins operations on November 1, 2014. On December 1, $100,000 (20% straight-line) are purchased. What would the CCA for the first fiscal year be? Claim CCA 2/12 months – November to December. Dispositions of Asset The basic rule for dealing with dispositions of capital assets is as follows: Undepreciated Capital Cost (UCC) Less: Lower of POD (Proceeds of Disposition) ACB (Capital Cost)  The Cases of Tax Consequences:  There will be situations in which immediate tax consequences arise:  Capital Gains: if POD > Capital Cost  Recapture: if the ending UCC is negative. Negative balance remaining because the disposal subtraction exceeds the UCC balance.  Terminal Loss: when a positive balance remains in the class with no assets remaining. 

CLASS 1 1 1 3 8 10 10.1 12 12 12 13 14 14.1 44 50 29 43 53

54

Explanation Residential Post 1987 – also includes the cost of certain additions or alternations you made to a Class 1 Building. 90% Non-Residential Post 1987 90% Manufacturing Post 1987 Any Building Pre 1988 Equipment Passenger Vehicles Less Than < $30,000 and any trucks/vans Passenger Vehicles More Than > $30,000; luxury vehicles Small Tools that cost Less Than < $500 (fully deductible in the year of acquisition) Dies, Jigs, Patterns, Moulds or lasts, and the cutting or shaping part of a machine. Computer software that is NOT system software (APPLICATION SOFTWARE). Leasehold Improvements Intangible Assets with LIMITED life Intangible Assets with UNLIMITED life Patents – possible elections General-purpose electronic data-processing equipment. Computer Hardware, System Software, Smartphones M&P after March 18, 2007 but before January 1, 2016 M&P before March 19, 2007 Machinery and Equipment acquired after 2015 and before 2026, that is used in Canada mainly to manufacture and process goods for sale or lease Zero-emission vehicles that would normally be in class 10 or 10.1. Limit of $55,000 + SALES TAX.

TRICKS:

HYR No

ACCII Yes

6% 10% 5% 20% 30%

No No No No No

Yes Yes N/A Yes Yes

30% 100%

No No

Yes No

100%

No

YES

100%

No

YES

SL SL 5% 25% 55%

No No No No No

Yes Yes Yes Yes Yes

50% or SL 30% 50%

Ish

N/A

No No

N/A Yes * Full Expensing

30%

No

Yes * Full Expensing

RATE 4%



Class 8 – Certain Elections  Included tools More Than > $500  Photocopiers, telephones and fax systems of greater than $1,000 will have THEIR OWN CLASS 8 ELECTION.  Each equipment over $1,000 will have a SEPARATE CLASS 8 ELECTION.  This class will be depreciated at the same 20% rate.



Class 10.1  This class is for any passenger vehicle with a value of over $30,000  In this class record additions at $30,000  There must be a separate class 10.1 - election for EVERY PASSENGER VEHICLE GREATER THAN $30,000.  In the year of disposition, you may claim ½ the CCA on the beginning UCC  NO RECAPTURE OR TERMINAL LOSS may be claimed in this class.



Class 12; certain items have the HYR  HALF-YEAR RULE EXISTS FOR:  Dies, jigs, patterns, moulds  Application software  Certified Canadian Films, rental Video cassettes  HALF-YEAR RULE IS NOT USED for the following:  Tools LESS THAN $500  Chinaware, utensils, linen, cutlery, dishes, uniforms, costumes  Medical and Dental Instruments



Class 13 – Straight Line  When you calculate CCA for this class, you must calculate based on the lesser of:

 Cost of Improvement/5 Years  Cost of Improvement/ (Lease Term + 1st Renewal Term) 

ACCII DO NOT APPLY.



Class 14 – Limited Intangibles  Keep in mind that class 14 holds only limited life intangible assets  CCA is always calculated on a pro-rata basis  This class has the ACCII rules



Class 14.1 – Unlimited Life intangibles  NO Terminal Loss can be claimed in this class UNLESS the business is being discontinued  Goodwill acquisitions must be combined to form one collective ACB.



Class 44 ...