AFM362 Lecture Notes - Lecture 7: Income Property, Capital Loss, Capital Gain
28 Jun 2018
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Department
Course
Professor
Capital property provides a long-term benefit that allows a business to earn revenues over a period of time. Most
capital property decrease in value.
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A/R, land, investments, PUP, LLP. They are all
not eligible for CCA
Non
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depreciable capital property
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Capital gain may arise
Capital loss on depreciable property is disallowed on the disposition because the value is fully
deducted through the CCA system
Depreciable property (including intangibles)
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Capital property is separated into two categories:
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CCA system is based on declining balance method
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By prescribing a specific method and specific rates to each class, alternative methods and the range of possible
results are minimized
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Types of capital property
The CCA system is not tax neutral because the allowance claimed on a depreciable asset affects the after-tax cash
flow received on the asset
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CCA and neutrality
So if I don't claim my CCA this year (or don't claim the maximum amount), I don't lose out much because my
CCA pool didn't go down (didn't go down as much)
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Note that if I don't claim CCA deduction this year, I can't double up next year○
A corporation may not decide to claim CCA in a taxation period because of the availability of losses either
from current year or from carry forwards from prior years
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Each year, taxpayers may claim any amount of CCA from zero to the maximum allowable claim, based on the asset
balance and the CCA rate for that pool, regardless of how much CCA was claimed in a prior year. The larger the
balance, the larger the claim can be.
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Quantity the NPV of the tax saving that will result from claiming declining balance CCA to determine the net of tax
cost of an asset. See example 5
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1
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CCA and tax planning
CCA cannot be claimed on a property until the property is "available for use"•
A property is available for use when it is delivered and capable of performing the function for which it was
acquired
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When all or substantially all of the building is first used for its intended purpose
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The second taxation year after the year of acquisition○
A building is available for use at the earlier of:
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Half year rule applies to the asset in the year that it becomes available for use•
Available for use rule
However, the tax system provides for the write
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off of the actual decline in value of assets during their
holding period because of recapture and terminal loss.
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For accounting purposes, differences between book value and p of d are considered gains or losses on the sale of
an asset.
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Sale of an asset may result in capital gain but not capital loss because all declines in value are handled through
CCA deductions and the final adjustment through either recapture or a terminal loss
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Comparison of CCA and accounting amortization
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main differences
What is a "depreciable property"?
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A property must fit into one of the prescribed classes of CCA or Schedule II to be depreciable
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Property, the cost of which is deductible in computing income
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Property that is described in inventory○
Property not acquired for the purpose of gaining or producing income
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Property that is a yacht, camp, lodge, golf course, or facility for which expenses are not deductible by reason
of paragraph
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Land; and○
Property situated outside Canada that is owned by non
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residents.
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The following items are the most important exclusions:
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Eligibility for CCA
Employees are prohibited from claiming CCA unless its automobile, aircraft, or instrument to perform his/her
employment duties
When a taxpayer has a number of properties within a particular class, the properties of that class are treated as
one unit for the purposes of CCA. See exhibit 5
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1 for the classes.
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Classes of assets for tangible capital property
See exhibit 5.2
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In the year an asset of a particular class is purchased, the full purchase cost (capital cost) is added to the balance
known as UCC
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In the year an asset of a particular class is disposed of, the lower of cost and proceeds of disposition are
subtracted from the balance in the class of assets.
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Deduct based on half year rule
Deduct up to maximum CCA
Add back half year rule
If the balance in the class of assets (UCC) is positive and there are still assets in that class
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If the balance in the class of assets is negative, take the negative balance into income as recapture CCA and
set the balance in the class to zero
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If the balance in the class is positive but no more assets in the class, take the positive balance known as a
terminal loss as a deduction from income and set the balance to zero
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At the end of the taxation year
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Rules for calculating CCA
Chapter 5 CCA
January 19, 2018
6:37 PM
AFM 362 Page 1
Document Summary
Capital property provides a long-term benefit that allows a business to earn revenues over a period of time. Capital loss on depreciable property is disallowed on the disposition because the value is fully deducted through the cca system. Cca system is based on declining balance method. By prescribing a specific method and specific rates to each class, alternative methods and the range of possible results are minimized. The cca system is not tax neutral because the allowance claimed on a depreciable asset affects the after-tax cash flow received on the asset. Each year, taxpayers may claim any amount of cca from zero to the maximum allowable claim, based on the asset balance and the cca rate for that pool, regardless of how much cca was claimed in a prior year. The larger the balance, the larger the claim can be.
