1. Lesson 4 Capital cost allowance and eligible capital property
Transactions between persons not dealing at arm’s– length
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2. Tax Depreciation System
Amortization is not acceptable for tax purposes.
Paragraph 20(1) (a) and 20(1) (b) provide the deduction under the (CCA) system.
Regulation groups the assets into classes and dictates the specific rates that follow those classes.
CCA is permissive.
Capital property confers an advantage of an enduring benefit.
Tax system separates capital property into three categories.
ACCOUNTING OR GAAP ALLOWS MANY DEPRACIATION AND AMORTIZATRION METHODS.IE. STRAIGHT LINE 2 DECLINEING BALANCE AND OTHER VAROIUS METHODS. ACCOUNTING STATEMENTS CAN REFLECT DIFFERENT VALUES FOR THE SAME ASSETS DEPENDING ON THE METHOD USED. THIS IS A PROBLEM BECAUSE A TRUE VALUE IS RARELY REFLECTED ON THE B/S. THE CCA SYSTEM IS STRICT AND LEAVES FEW IF ANY CHOICES.
CAPITAL ITEM VRS ORDINARY EXPENDITURE..
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3. Capital Property Categories
Non-depreciable property
Eligible capital property
Depreciable property
Non –depreciable property represents inventory, receivables,land ,investments, personal use property and listed personal property.Key note is that non depreciable property is not eligible for CCA.
Eligible capital property includes items such as goodwill, patents, unlimited franchise rights and incorporation
costs.20(1)(b) permits the deduction
Depreciable property includes all other items such as are equipment, buildings, vehicles etc.see Reg 1100and schedule ii 46 different classes.
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4. Calculating CCA UCC Additions Dispositions Prescribed rate
CCA=UCC+Additions-disposals x rate
1}undepreciated capital cost of the assets in the pool.2 any current year purchases to are specified classes.This is the Capital cost or cost of putting the asset into use. All cost associated with putting assets into use like delivery provincial sales tax installation. Interest can be capitalized under sec 21(1) any portion. Subsidies or other forms of assistance reduces the capital cost.
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5. Special Issues on Dispositions
Proceeds of disposition arise from involuntary and voluntary dispositions.
Recapture (negative UCC).
Terminal loss (UCC no assets left in class).
Capital gain.
Capital loss ** no such thing on depreciable property.
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6. Real Estate Property Disposition of both land and building together.
Allocation problem as capital gains only 50% taxable, while recapture is 100% taxable.
Sec. 68 and subsection 13(21.1) prevent abusive allocations. Must allocate terminal loss to reduce capital gain.
Subsection 248(1) cost is equal to UCC in the case of depreciable property and adjusted cost base for non-depreciable property.
Sell property for one price that includes land and building. More beneficial to allocate more proceeds to land than building.
Sec 68 allocation must be reasonable up to tax payer to show that it is reasonable. 13(21.1) reduces capital gains on land by any terminal loss on building.
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7. Exceptions and Restrictions to the Rules
Involuntary dispositions can result in recapture.
Subsection13(4) provides relief by allowing the taxpayer to elect to defer the recapture as long as the replacement property is purchased by the end of the second year following the year of disposition. Also section 44 provides relief for capital gain.
Voluntary dispositions of a former business property can also find relief under 13(4).
Excludes rental property and leaseholds.
Transfers to another class.
Change in use.
Capitalize interest
MUST FILE AND REPORT RECAPTURE THEN AMMEND RETURN WHEN REPLACEMENT PROPERTY IS PURCHASED
Classification changes allow you to transfer the UCC of the old capital property to the new class to avoid recapture.
SELL YOUR BUILDING AND MOVE TO ANOTHER OR BUILD.
Make classification changes. Could cause recapture. Reg 1103(2d). Transfer ucc of old class 3 immediately before the disposition to class 1
Change in use is a disposition transactions take place a FMV.
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8. Rental and Leasing Property
All rental properties costing $50,000 or more go into a separate class.
CCA can not be used to increase a rental loss per REG 1100.
A corporation whose principle business was renting or leasing of property is excluded from this rule.
In the case of multiple rental properties CCA claimed cannot exceed the total net rental revenue.
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9. Separate class rule for electronic office equipment
Taxpayers may elect to place one or more specified properties that would ordinarily be classified in class 8 or 10 in a separate class. These specified properties are
General purpose electronic data processing equipment and systems software included in class 10
Computer software not in class 10 or class 12
Photocopier ,normally included in class 8
Electronic communications equipment, such as a facsimile tramsmission device or telephone equipment,normally included in class 8
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10. Separate class rule
Property placed in separate classes in this manner must have a capital cost of a least $1,000
This election allows for the availability of a terminal loss deduction when all of the assets in such a class are sold for less than the UCC of that class. If assets decline in value more rapidly than the CCA rates of the various classes due to technological obsolesce, then the terminal loss is likely on disposition if these assets are separated from the other class 8 or class 10 assets
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11. Separate class rule
A special transfer rule allows the transfer of class 8 and 10 assets of a separate class back to their main class 8 or class 10 after four taxation years. Therefore if the assets in a separate class have not been disposed of after the Five –year period from the end of the taxation year of their acquisition, the potential terminal loss deduction in the separate class will not be available.
This election is available for class 43 manufacturing and processing equipment if elections is made.
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12. Eligible Capital Property
Goodwill,customer lists,trademarks,unlimited term franchises, incorporation or reorganization costs, milk quotes, government rights and patent and patent rights not included in class 14 or 44.
ECP is not capital property.
Gains are taxed as ordinary income.
Pooled together in a tax account known as CEC.
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13. Eligible Capital Property Cont’d
75% of the cost is added to the CEC account.
7% deduction under 20(1)(b) called amortization.
Declining balance,optional and prorated for short year ends.
Dispositions can cause some problems.
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14. Dispositions of Eligible Capital Property
Net proceeds are credited to CEC at 75% of the amount received or receivable.
Any positive balance remaining will be amortized at 7% or deducted like a terminal loss depending on the situation.
Negative balance is income.
Other way of calculating is to re capture up to cost of what went into CEC Then take origal cost =25000/2=12500
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15. Non –Arm’s-length Acquisitions
Subsection 251(1) all related persons are deemed not to be at arm’s length.
251(2) defines related as individuals connected by blood,marriage,common-law or adoption.Corporations are related to the person or persons that control them.
Section 69 governs the basic rule of non arm’s length transactions. Ie FMV.
Paragraph 13(7)(e) see example.
Section WHERE A PERSON PAYS MORE THAN FMV,THEY ARE DEEMED TO HAVE PAID FMV.2 WHERE A PERSON RECEIVES LESS THAN FMV THEY ARE DEEMED TO HAVE RECEIVED FMV.(NOTE PURCHASURE,S COST IS STILL THE LESSER AMOUNT.GIFTS YOU ARE DEEMED TO HAVE PAID OR RECEIVED FMV.
½ RULE DOES NOT APPLY TO PROPERTY ACQUIRED BY PERSONS NOT DEALING AT ARM,S LENGTH.
IF THE PROPERTY WAS DEPRECIABLE PROPERTY OF THE TRANSFEROR.
THE PROPERTY WAS OWNED FOR 365 DAYS BEFORE THE END OF THE TAXATION YEAR OF THE AQUIRER .
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16. Summary
Make a determination on which is capital expenditures and which is not.
Rates for each class is set out in Reg schedule II.
Intangible assets are amortized at 75% of the cost and a allowed rate of 7%.
Dispositions can lead to capital gains,recapture and terminal loses or combination of both.
The act restricts transactions between non-arm’s length parties.Deemed disposition at FMV
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