1. Chapter Objectives Be able to: n Explain how the standardized system for depreciable property works including the declining balance method and pooling concept. n Calculate CCA on the various asset classes. n Calculate recapture and terminal losses. n Identify and apply the various exceptions in calculating CCA. n Calculate the deduction for Eligible Capital Property.

2. A Standardized System for Depreciable Property n Depreciation is the process of allocating the cost of capital property over the useful life of the asset and it includes making estimates of useful life, salvage value and annual contribution over the useful life. n Without a standardized system, these estimates would likely result in different results between similar business. The ITA creates a standardized system to avoid this fluctuation. n The ITA separates capital assets in to two categories: Depreciable capital property and Eligible capital property. n Depreciable capital property includes primarily tangible assets and the annual allocation is called Capital cost allowance. n Eligible capital property includes intangible assets.

3. Who Qualifies for CCA and on What Assets n Both individuals and corporations qualify for CCA as long as the capital asset is used in producing income. n CCA can be claimed on all tangible assets (except land) and certain intangible assets. n To be eligible for CCA, the taxpayer must have legal title to the property and the asset must be available for use. n The cost available for the allocation of CCA is the original purchase price plus all costs incurred to bring the asset to a state of working order. n Subsequent major renovations to an asset that improve that asset beyond its original condition are of a capital nature and become part of the capital cost.

4. Rates of CCA n A particular type of asset will be assigned to a specific class. n Each specific class has a CCA rate and this rate is a maximum for that class. n If the maximum is not claimed, the unused portion is carried forward and is available in future years n Classes 13 & 14 do not have specific rates. These classes have rates which vary according to the nature of the particular asset.

5. The Declining Balance Method n This method annually applies the CCA rate for the particular class of an asset to the remaining undepreciated portion of an assets original capital cost. n Classes 13 & 14 do not use this method of depreciation. n Most asset classes are subject to the one-half rule which means that CCA is restricted to one-half the normal rate in the year of an assets acquisition. The rationale is that no prorating is required due to different purchase dates within the year. This rule does not apply to class 14 and certain assets in class 12. n Most asset classes are also subject to the short taxation year rule which means that CCA is prorated by days during a short taxation year. An example would be when it is the first year of operations for a business. The rationale is that prorating for short taxation years is always required. This rule does not apply to classes 14 & 15.

6. Pooling of Assets of the Same Class n All of the assets of the same asset class are placed in a common pool. As a result, each asset loses its individual identity as it gets added to the pool of its asset class. n In conjunction with the declining balance method, this means that CCA on the undepreciated capital cost at the beginning of the year is treated differently from CCA on net additions (disposals). n The difference is due to the fact that the one-half rule only applies to net additions and does not apply when there is net disposals. n Disposals are limited in amount to the original capital cost of the asset disposed of.

7. Gains & Losses on Disposal of Depreciable Property n As a result of the pooling system of capital assets, gains and losses on depreciable property remain in the pool and are averaged over the life of the pool except where the sale price exceeds the original capital cost. n This would be a capital gain and it is recognized in the year of disposition. This is why disposals recorded in the pool are limited to an assets original cost and the capital gain is treated separately. Note that it is not possible to have a capital loss on depreciable property. n If there is a positive balance left in a pool at the end of a taxation year and there are no assets left in the asset class, a terminal loss should be claimed for the balance. n If there is a negative balance left in a pool at the end of a taxation year, a recapture should be claimed for the balance. This is regardless of whether there are assets left in the asset class.

8. Special Treatment of Passenger Vehicles n Passenger vehicles costing more than the established maximum are recorded not only in a separate asset class (10.1) but the vehicles are not pooled. n In the year of acquisition, the one-half rule applies. n In the year of disposal, recapture and terminal losses are not permitted but one-half of the CCA is claimable as long as another vehicle is acquired to replace it. n Passenger vehicles that cost less than the established maximum are treated in the usual fashion in class 10. n These provisions are designed to limit the deductions available for luxury cars.

9. Special Treatment of Computers, Faxes, Photocopiers and Manufacturing Assets n Within the relevant asset class, a taxpayer can elect for assets costing over $1,000 to not be pooled. n This would enable a taxpayer to recognize terminal losses on disposal assets which have rapid obsolescence. Otherwise, if these assets were pooled, the loss would be averaged with the remaining assets. n However, if the assets remain after the beginning of the fifth year, they must be pooled with other assets in the asset class.

10. Exceptions to the Declining Balance Method and the Pooling Concept n Leasehold improvements (class 13) and franchises, licenses and such (class 14) are unique depending on the contractual arrangements. As a result, the declining balance method with standardized CCA rates is not used in these cases. n Leasehold improvements are allocated using the straight-line method over the life of the lease plus one renewable option period, with a 5- year minimum. Also, no pooling occurs. Additional improvements in the future would be allocated over the remaining term of the lease and renewal period. n Inducement payments from the landlord may be recognized as either business income or as a reduction of leasehold improvements. n Franchises and such are similar in treatment. Costs are not pooled and are allocated over the life of the franchise, etc. using the straight-line method. Proration is calculated using days.

11. Eligible Capital Property n Eligible capital property are normally intangible assets and they have no specific legal life. Examples are goodwill, trademarks, customer lists, incorporation costs and franchises that do not have a specific legal limited life. Franchises with a limited life would be class 14. n All assets are in one pool. Additions and disposals, regardless of original cost, are recorded at 75%. CCA rate is 7%. The one-half rule does not apply. n If the pool is negative, the full amount is added to business income but only to the extent that it represents the recapture of amounts previously deducted. n If the pool is negative and it exceeds the amount that represents the recapture of amounts previously deducted, two-thirds of that excess is added to business income. Note that two-thirds of the 75% originally added is equal to the 50% inclusion rate for capital gains.