Lecture One - ACCO 440 NOTES PDF

Preview

Summary

ACCO 440 NOTES...

Description

ACCO 440-Lecture 1 - Capital Cost Allowance (Ch.5) Course Lecturer: Maria Caterina Raco, CPA,CGA, CPA(DE), LL.M. (Fisc.) Page 1 of 29

All Rights Reserved © M. Caterina Raco

Table of Contents Income Tax Folio S3-F4-C1, General Discussion of Capital Cost Allowance ................. 2

–

Pearson e-Text Link: .......................................................................................................................................... 2 1.

What is Capital Cost Allowance ? ......................................................................................................... 3

2.

Accounting Depreciation ......................................................................................................................... 4 2.1. 2.2. 2.3. 2.4. 2.5.

Capital Cost Allowance (CCA) ........................................................................................................................ 4 Undepreciated Capital Cost Allowance (UCC) ......................................................................................... 4 Acquisitions ......................................................................................................................................................... 4 Dispositions ......................................................................................................................................................... 5 Capital Cost Allowance .................................................................................................................................... 6

3.

Additions to Capital Cost ......................................................................................................................... 6

4.

Available for Use Rules ............................................................................................................................ 7

5.

Segregation into Classes .......................................................................................................................... 8

6.

Separate Classes ......................................................................................................................................... 9

7.

Capital Cost Allowance – Mechanism .................................................................................................. 9

7.1

Half-Year Rule: CCA amount is limited ........................................................................................11

7.1.1 7.2

Exceptions to the half-year rule: ................................................................................................11 Accelerated Investment Incentive (“AccII” or “ACCII”) –enhanced CCA deduction: ....12

7.2.1

Half-Year Rule vs Accelerated Investment Incentive (ACCII) – ......................................13

7.2.2

Example-CCA -PRE & POST ACCII:..............................................................................................13

7.3 8.

Short Taxation Years ..........................................................................................................................14 Application CCA Calculation .................................................................................................................14

8.1.

Declining Balance CCA Example: Half-Year rule vs ACCII......................................................14

8.2.

Straight Line Depreciation-Class 13 & ACCII .............................................................................16

8.2.1.

Straight Line Depreciation-Class 14 & ACCII .........................................................................17

8.3.

ACCII Application-Class 53 (100% write off) .............................................................................18

8.4.

ZERO EMISSION VEHICLES ................................................................................................................19

9.

CCA Tax Planning .....................................................................................................................................21

10.

Dispositions of Depreciable Assets ...............................................................................................22

11.

Disposition of Class 54 Assets (Zero Emission Vehicles) .....................................................23

12.

Cumulative Eligible Capital Expenditures (CEC)- Now Class 14.1 Regime ......................24

13.

Separate Class Election:.....................................................................................................................25 1 No Reproduction Without Express Consent of the Author

ACCO-440 –Lecture 1- Capital Cost Allowance All rights reserved © Maria Caterina Raco

ACCO 440-Lecture 1 - Capital Cost Allowance (Ch.5) Course Lecturer: Maria Caterina Raco, CPA,CGA, CPA(DE), LL.M. (Fisc.) Page 2 of 29

All Rights Reserved © M. Caterina Raco

Separate Class Election: ............................................................................................................................................................. 25

14.

Table 1 : CCA TABLE- COMMON CCA CLASSES ............................................................................26

–

Income Tax Folio S3- F4-C1, General Discussion of Capital Cost Allowance1

Pearson e-Text Link: https://etext-ise.pearson.com/products/168653/pages/199

https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-3-property-investments-savingsplans/series-3-property-investments-savings-plans-folio-4-capital-cost-allowance/income-tax-folio- s3-f4-c1-general-discussion-capital-cost-allowance.html

1

ACCO-440 –Lecture 1- Capital Cost Allowance All rights reserved © Maria Caterina Raco

No Reproduction Without Express Consent of the Author

2

ACCO 440-Lecture 1 - Capital Cost Allowance (Ch.5) Course Lecturer: Maria Caterina Raco, CPA,CGA, CPA(DE), LL.M. (Fisc.) Page 3 of 29

All Rights Reserved © M. Caterina Raco

1. What is Capital Cost Allowance ? In computing income from a business, we refer to subdivision b of the Income Tax Act (“ITA”)). We have several adjustments, additions and deductions from book income (accounting income) to arrive at net income from a business for tax purposes that are required by the ITA.

We will review this in Week 2

General limitations when computing net income from a business for tax purposes are found in ITA 18(1). 18(1)(b) prohibits the deduction of any outlay, loss or replacement of capital, payment on account of capital or any allowance for depreciation, obsolescence or depletion, unless specifically allowed in Part I of the Act2

Capital cost allowance (CCA) is similar to accounting depreciation. Depreciation is an accounting method of allocating the cost of a tangible or physical asset over its useful life or life expectancy. Depreciation represents how much of an asset's value has been used up. 3

Matching principle of accounting: Tie cost of the asset to the useful life

In tax, the equivalent to “accounting depreciation” is “tax depreciation”, referred to as “capital cost allowance”, otherwise known as “CCA.” General Rule: capital expenditures follow the following general rules: •

ITA 18(1)(b) – Specifies deduction for capital cost of capital expenditures are disallowed

•

ITA 20(1)(a) – paragraph 20(1)(a) permits a deduction for part of the capital cost of property, as allowed by the Income Tax Regulations (ITR).

•

Under Part XI of the Regulations, a taxpayer's depreciable property is grouped into various classes. The classes are described in Schedule II of the Regulations. The maximum rate of CCA allowed is prescribed for each class in subsection 1100(1) of the Regulations

•

Part XI of ITR groups the capital property into various CCA classes (see Table 1 for details included at the end of this handout).

2 Income Tax Folio S3-F4-C1, General Discussion of Capital Cost Allowance, par. 1.1 3 https://www.investopedia.com/terms/d/depreciation.asp ACCO-440 –Lecture 1- Capital Cost Allowance All rights reserved © Maria Caterina Raco

No Reproduction Without Express Consent of the Author

3

ACCO 440-Lecture 1 - Capital Cost Allowance (Ch.5) Course Lecturer: Maria Caterina Raco, CPA,CGA, CPA(DE), LL.M. (Fisc.) Page 4 of 29

All Rights Reserved © M. Caterina Raco

2. Accounting Depreciation In taxation, tax depreciation is referred to as “capital cost allowance” (CCA). Tax depreciation is similar to accounting depreciation. The primary difference is that tax depreciation follows the rules and regulations as prescribed in the Income Tax Regulations of the ITA, whereas accounting depreciation follows the rules in accordance to the Generally Accepted Accounting Principles (GAAP). However, the nature of the expense is similar.

2.1. Capital Cost Allowance (CCA) CCA in tax is similar to accounting “amortization or depreciation expense.”

What is the capital cost for tax purposes? Capital Cost for tax purposes is similar to accounting “acquisition cost.” Typically, for tax purposes, capital cost: • • •

constitutes an expenditure that is capital in nature refers to expense incurred on account of capital and not on account of income (determined on a fact by fact basis) an expenditure that has an enduring benefit is generally a capital expenditure

2.2. Undepreciated Capital Cost Allowance (UCC) In tax, UCC is similar to accounting “Net Book Value” (NBV). However, the computation of tax UCC differs from the computation of accounting NBV. In Accounting: • NBV Calculation: Reduce end of year NBV balance by current year amortization expense In Tax: • UCC Calculation: Reduce UCC by the preceding year CCA

2.3. Acquisitions • •

Capital cost is generally equivalent to the acquisition cost for accounting purposes. It is generally equivalent to the fair market value (FMV) of consideration given to acquire the asset.

ACCO-440 –Lecture 1- Capital Cost Allowance All rights reserved © Maria Caterina Raco

No Reproduction Without Express Consent of the Author

4

ACCO 440-Lecture 1 - Capital Cost Allowance (Ch.5) Course Lecturer: Maria Caterina Raco, CPA,CGA, CPA(DE), LL.M. (Fisc.) Page 5 of 29

All Rights Reserved © M. Caterina Raco

Tax Note: There are circumstances where the capital cost will differ from FMV for tax purposes with respect to certain circumstances in regard to non-arm’s length transactions highlighted in the ITA. See, for example, Chapter 9- Non-Arm’s Length Transfers of Property. However, this will not be covered in this course.

2.4. Dispositions The tables below highlight the difference between accounting and tax when there is a disposition of capital property. Accounting result of a disposition of capital property : Proceeds from the disposition X Proceeds from the disposition Minus: Minus: NBV (X) NBV Accounting loss (if negative) ( X ) Accounting gain (if positive).

X (X) X

Tax result of a disposition of capital property: UCC Class - illustration of a disposition that results in a positive ending balance UCC Minus:

UCC Class – illustration of a disposition that results in a negative UCC ending balance

X

UCC Minus:

Lesser of i) Proceeds of Disposition ii) Capital Cost

Lesser of i) Proceeds of Disposition ii) Capital Cost

lesser of (i) and (ii)

(X)

lesser of (i) and (ii)

(X)

UCC ending balance (positive)

X

UCC ending balance (negative)

(X)

Tax consequences possibilities: • • •

X

no tax consequences in current yearsimply reduces UCC balance (and future CCA claims) capital loss of capital property: not permissible in tax (hence, always NIL) terminal loss of CCA only (*) if UCC class is empty *exceptions may apply

Tax consequences possibilities: • • • •

no tax consequences in current yearsimply reduces UCC balance (and future CCA claims) capital gain capital gain and recapture of CCA recapture of CCA only(*) (UCC class does not need to be empty) *exceptions may apply

Tax consequences in case of disposition of capital assets will be explained later ACCO-440 –Lecture 1- Capital Cost Allowance All rights reserved © Maria Caterina Raco

No Reproduction Without Express Consent of the Author

5

ACCO 440-Lecture 1 - Capital Cost Allowance (Ch.5) Course Lecturer: Maria Caterina Raco, CPA,CGA, CPA(DE), LL.M. (Fisc.) Page 6 of 29

All Rights Reserved © M. Caterina Raco

2.5. Capital Cost Allowance In Accounting: • “Amortization”: follows the Generally Accepted Accounting Principles (GAAP). • The method adopted must be applied consistently. • Straight-line deprecation is the most commonly used depreciation method in accounting. In Tax: • CCA: follows the method identified in the ITR • The required method is either straight-line method or declining balance method. • Declining balance method applies to most of the common CCA classes • The taxpayer may choose to deduct an optimal amount of CCA, from NIL to the maximum computed amount. Tax Tip: remember taxpayer can limit the amount of CCA deduction claimed. It is not an election. The taxpayer can limit the amount of CCA each year and can change the limit each year- consistency is not a requirement.

3. Additions to Capital Cost • •

CCA may be claimed on capital property that is depreciable property of a taxpayer Capital property typically refers to property: o o o o

that is owned by the taxpayer or deemed owned by the taxpayer, or in which the taxpayer has a leasehold interest; and property is available for use (*) (*) will be discussed further below

•

Capital property typically refers to property: included in one of the prescribed classes in Schedule II of Part XI of the ITR (see Table 1 for partial list)

•

the following property is generally not considered depreciable property:4 o

property that is not acquired for the purpose of gaining or producing income;

4 Income Tax Folio S3-F4-C1, General Discussion of Capital Cost Allowance, par. 1.17 ACCO-440 –Lecture 1- Capital Cost Allowance All rights reserved © Maria Caterina Raco No Reproduction Without Express Consent of the Author

6

ACCO 440-Lecture 1 - Capital Cost Allowance (Ch.5) Course Lecturer: Maria Caterina Raco, CPA,CGA, CPA(DE), LL.M. (Fisc.) Page 7 of 29

All Rights Reserved © M. Caterina Raco

o o o

property that is described in the taxpayer's inventory; property that is land; property where the cost of which has been deducted as a scientific research and experimental development expense.

Comment: A taxpayer who acquires or holds property as an agent or nominee for another person cannot claim CCA for such property.

4. Available for Use Rules •

Per ITA 13(26), even if capital property is acquired, CCA cannot be deducted until the property is “available for use”.

•

“Available for use” is interpreted in ITA 13(27) for the purpose of ITA 13(26).

•

The property available for use is separated between building and non-building.

•

For property other than buildings: the common rules of ITA 13(27) indicate that property is considered to become available for use by the taxpayer at the earliest of: the time the property is first used by the taxpayer for the purpose of earning income (ITA 13(27)(a))

the time that is immediately after the beginning of the taxpayer's first taxation year that begins more than 357 days after the end of the taxpayer's taxation year in which the property was acquired by the taxpayer, i.e, second taxation year after the year in which the property was (ITA 13(27)(b)) acquired – it’s referred to as the two-year rolling-start rule. the time that is immediately before the disposition of the property by the taxpayer (ITA 13(27)(c)) in the case of property of a taxpayer that is a motor vehicle, (or other transport equipment), that require certificates or licences evidencing that the property may be operated by the taxpayer, the time all those permits, certificates or licences have been obtained (ITA 13(27)(f)) for a corporation that is a public corporation, the end of the taxation year for which depreciation in respect of the property is first deducted in computing the earnings of the corporation in accordance with generally accepted accounting principles and for the purpose of the financial statements of the corporation for the year (ITA 13(27)(h))

ACCO-440 –Lecture 1- Capital Cost Allowance All rights reserved © Maria Caterina Raco

No Reproduction Without Express Consent of the Author

7

ACCO 440-Lecture 1 - Capital Cost Allowance (Ch.5) Course Lecturer: Maria Caterina Raco, CPA,CGA, CPA(DE), LL.M. (Fisc.) Page 8 of 29

All Rights Reserved © M. Caterina Raco

2. For buildings: ITA 13(28) indicate that a building, or a part thereof, is considered to become available for use by the taxpayer at the earliest of: 90% or more the time all ntially all of the building is first used by the taxpayer for the purpose for which it was acquired, (ITA 13(28)(a)) the time the construction of the building is complete, (ITA 13(28)(b)) the time that is immediately after the beginning of the taxpayer’s first taxation year that begins more than 357 days after the end of the taxpayer’s taxation year in which the property was acquired by the taxpayer, (ITA 13(28)(c)) i.e, second taxation year after the year in which the property was acquired – it’s referred to as the two-year rolling -start rule the time immediately before the taxpayer disposes of the building. (ITA 13(28)(d))

The above ITA 13(27) and ITA 13(28) rules listed are incomplete. Coverage of complete rules go beyond the scope of this course.

5. Segregation into Classes Capital property is segregated into classes, according the class description provided in ITR Part XI and Schedules II to VI ( see Table 1 for common list). Particularities: Class 8 lists tangible assets generally NOT included in other classes Land and inventory are excluded from depreciable property (ITR 1102)

ACCO-440 –Lecture 1- Capital Cost Allowance All rights reserved © Maria Caterina Raco

No Reproduction Without Express Consent of the Author

8

ACCO 440-Lecture 1 - Capital Cost Allowance (Ch.5) Course Lecturer: Maria Caterina Raco, CPA,CGA, CPA(DE), LL.M. (Fisc.) Page 9 of 29

All Rights Reserved © M. Caterina Raco

6. Separate Classes A taxpayer may acquire two identical properties. General rule: •

Identical or similar properties are grouped in the same class

Special Rules •

separate businesses: use a separate class for separate businesses.

•

real estate property: use a separate class for each rental property acquired after 1971 that cost $50,000 or more. Purpose: when the rental...