Chapter 5

Depreciable Property and Eligible Capital Property

1

CCA System

• Expenses deductible if incurred to earn income– capital property usually provides future benefit over

several periods

• Amortization (GAAP) versus CCA (Tax)– Amortization is mandatory and uses useful life

– CCA and CECA is optional but specific and leaves few, if any, alternative choices in calculation

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CCA System

• Types of capital property– Non-depreciable capital property– Depreciable Property– Eligible Capital Property

• Other considerations– CCA and neutrality– CCA and tax planning

3

CCA System

• Eligibility for CCA– Depreciable property – exclusions

• Property, the cost of which is deductible in computing income;• Property that is described as inventory;• Property not acquired for the purpose of gaining or producing

income;• Property that is a yacht, camp, lodge, golf course, or facility for

which expenses are not deductible by reason of par. 18(1)(f);• Land; and• Property situated outside Canada that is owned by non-residents.

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CCA System

• Eligibility for CCA– Employees – generally prohibited– Businesses – generally allowed

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Basic Rules of CCA

UCC of the class at the beginning of the year $ xxx

Add: purchases during the year xxx

Deduct: dispositions during the year at lesser of:

(a) Capital Cost $ xxx

(b) Proceeds of disposition $ xxx (xxx)

UCC before adjustment $ xxx

Deduct: ½ net amount (xxx)

UCC before CCA $ xxx

Deduct: CCA for the year (xxx)

Add: ½ net amount xxx

UCC at the end of the year $ xxx

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Basic Rules of CCA

• Half-year rule– Attempt by the Act to adjust for length of time in the

year that an asset is owned in year of purchase/disposition

– “1/2 net amount” in calculationPurchases during the year $ xxx

Deduct: less of capital cost

and proceeds of disposition (xxx)

Net amount (positive only) $ xxx

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Basic Rules of CCAExhibit 5-2

Common Property not Affected by the Half-Year Rule

Class Paragraph Property

12 (a) A book that is a part of a lending library

(b) Chinaware, cutlery, or other tableware

(c) Kitchen utensil costing less than $500

(e) Medical or dental instrument costing less than $500

(g) Linen

(h) Tool costing less than $500

(i) Uniform

(k) Rental apparel or costume, including accessories

14 Patent, franchise, concession or licence for a limited period

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Basic Rules of CCA

Recapture on disposition:

Capital Cost $10,000

Proceeds on disposition 8,000

UCC 7,000

Recapture of CCA claimed

Recapture will be an inclusion in income reflecting adisposition in excess of UCC, which resulted in a negativeUCC balance.

Previously claimedas CCA

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Basic Rules of CCA

Terminal loss on disposition:

Capital Cost $10,000

UCC 7,000

Proceeds of Disposition 5,000Terminal loss

Terminal loss reflects additional decline in value over $3,000of CCA previously claimed. A terminal loss is deducted fromnet income if no assets remain in the class. If assets remain inthe class, continue to claim CCA on UCC balance.

Previously claimedas CCA

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Basic Rules of CCA

• “Available-for-use” rule

• Cost of depreciable property with trade-in

• CCA as a permissive deduction

• Taxation year less than 12 months

• Ownership of property

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Automobiles used in employment or business

Used in Business Used for Employment

Class 10.1 Automobiles

For automobiles where primary purpose is to transport passengers and cost is greater than $30,000 + GST and PST/HST

• Maximum $30,000 + GST and PST/HST

• Separate class for each automobile

• Recapture and terminal loss rules do not apply if cost is in excess of prescribed limit

• Same rules apply as for business

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Automobiles used in employment or business

Used in Business Used for Employment

Class 10 AutomobilesFor passenger vehicles that cost < $30,000 + GST and PST/HST

Vehicles whose primary purpose is not passengers

• Basic rules apply including both recapture and terminal losses

• Recapture applies; however, terminal losses are not allowed

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Electronic Office Equipment

• May elect to place one or more specified properties ordinarily in class 8 or 10 in a separate class

• Specified properties (must be at least $1,000):– General purpose electronic data processing equipment

and systems software (Cl. 10);

– Computer software (Cl. 8);

– A photocopier (Cl. 8); and

– Electronic communications equipment (Cl. 8).

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Electronic Office Equipment

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• Computer equipment acquired on or after March 19, 2007– Added to class 50 with a CCA rate of 55%

Basic Rules

• Transfers to another class – avoiding recapture

• Interest expense

• Capital cost reduction for cost assistance

• Inducement payments

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Exceptions to Declining Balance Method

• Leasehold improvements– CCA is least of:

i. 1/5 of the capital cost of the leasehold interest; and

ii. Capital cost of leasehold interest divided by the number of 12-month periods from the beginning of the year in which the cost was incurred to the end of the term of the lease plus the first renewal term (not to exceed 40 such 12-month periods).

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Leasehold Interest Example

If a $16,000 leasehold improvement is made on a rental building. Details of lease:

Lease term 5 years

Renewal options 2 options to renew of 3 years and 2

years

What is the CCA for each year?

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Leasehold Interest Example

• CCA would be lesser of:i. 1/5 * Capital cost ($16,000) $3,200

ii. $16,000 / [ 5 + 3] $2,000

CCA would be $1,000 in first year, $2,000 in

each of the next seven years, and remaining

$1,000 in the ninth year.

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Exceptions to the Declining Balance Method

• Class 14 Limited Life Intangibles– Based on remaining legal life of asset

– Includes patents, franchises, concessions, or licences

– Patents included in Class 44 unless elected not to be included in Class 44 but Class 14

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Exceptions to the Declining Balance Method

• Manufacturing and processing machinery and equipment– If property used in manufacturing and processing acquired after

March 19, 2007 and before 2014, asset is added to Class 29 (50% rate)

– NOTE: The March 21, 2013 federal Budget proposes to extend the time period to acquire this equipment from “before 2014” to “before 2016”.

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Involuntary and Voluntary Disposition

• Involuntary Dispositions– Taxpayer may elect in the replacement of

property to offset any recapture caused by proceeds for the loss

• Replacement must be made the later of – 24 months after the initial taxation year; or

– By the end of the second taxation year following the year in which the proceeds are considered receivable.

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Involuntary and Voluntary Disposition

• Voluntary Disposition– Same rules to offset recapture available for certain

voluntary disposition of depreciable “former business property” but replacement must be made the later of:

• 12 months after the initial taxation year; or

• By the end of the first taxation year following the year of disposition.

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Change in Use and Part Disposition Rules

• Change from income-producing to other purpose• Change from non-income-producing to income-

producing purpose• Property acquired for multiple purposes• Non-arm’s length transfer of depreciable property

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Franchises and Similar Property

• Expenses for representation for obtaining franchises or patents can be:– An immediate deduction of the cost;

– A deduction of the cost over a 10-year period; and

– Capitalization of the cost in the appropriate CCA class or eligible capital property pool.

• Franchises with unlimited lives would be eligible capital property

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Eligible Capital Property

• Intangible property known as “nothings”– Includes purchased goodwill, franchises with unlimited

lives, incorporation costs

• ¾ of each eligible expenditure add to cumulative eligible capital (CEC) account

• Amortized on a declining balance using a maximum rate of 7%

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Eligible Capital Property

• Election re: Capital Gain– Allows taxpayer to treat a gain on the disposition of

eligible capital property as a capital gain.

– Conditions:• Property disposed must be eligible capital property of a

business, but not goodwill.

• The cost of the property must be determinable.

• Proceeds of disposition must exceed the cost.

• Taxpayer’s exempt gains balance in respect of the business must be NIL.

• The taxpayer must elect in the taxpayer’s return of income for the year.

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Capital Personal Property and the Input Tax Credit System under GST/HST

• Basic Rules– Input tax credit available on purchase of property or

service acquired for commercial activity

– Special rules for capital property depending on type• Capital personal property

• Capital real property

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• Passenger Vehicles– Owned by registrants other than individuals or

partnerships• Input tax credit may only be claimed on cost of vehicle up to

$30,000 if primary-use test met.

– Owned by registrants who are individuals or partnerships

• May claim input tax credit if vehicle used exclusively (90% or more) in commercial activity

• May claim input tax credit on cost up to $30,000

Capital Personal Property and the Input Tax Credit System under GST/HST

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