CHAPTER 6:

The Acquisition, Use, and

Disposal of Depreciable
Property

Prepared by

Kristie Dewald
University of Alberta
Electronic Presentations in Microsoft PowerPoint

Copyright 2016 McGraw-Hill Education Limited

The Acquisition, Use, and Disposal of

Depreciable Property
I.

A Standardized System for Depreciable

Property.
II. Depreciable Property and Capital Cost
Allowance (CCA).
III. The Treatment of Eligible Capital Property
(ECP).
IV. Accounting Rules vs. Tax Rules.
V. Impact on Management Decisions.

I. A Standardized System For Depreciable

Property
Depreciation/Amortization is:
Process of allocating the cost of an asset
Over its useful life
To match its cost against the income it generates.

Process requires estimates of:

Useful life
Salvage value
Contribution to the business in each year

I. A Standardized System For Depreciable

Property
Process requires judgment,
Similar businesses acquiring similar assets may reach different
estimates
Leads to different income in each of the years that the asset is
used.

Total cost deducted will be the same,

Maximum deducted cannot exceed the original cost of the
asset.

Because of these differences, accounting

depreciation is disallowed as a deduction for tax.

I. A Standardized System For Depreciable

Property
Each company purchases the same asset but the
useful life is determined to be different
Company A
Asset Cost
$10,000
Est. useful life
4 yrs
Expense per year
$2,500

Company B
Asset Cost
$10,000
Est. useful life
6
yrs
Expense per year $1,667

Company A would receive the total tax benefit 2 years

earlier than Company B as a result of the difference in
Estimated useful life.
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I. A Standardized System For Depreciable

Property
Because of these differences, accounting depreciation is
disallowed as a deduction for tax.
A uniform and arbitrary system is used to expense
assets cost.
Divides assets into two general categories:
1. Depreciable capital property
2. Eligible capital property

II. Depreciable Property and Capital Cost

Allowance (CCA)
Calculation of the CCA:
1.
2.
3.
4.

Start with opening balance (UCC).

Add any additional purchases.
Deduct any disposals.
Apply the appropriate CCA rate to the resulting balance.

A. Who Qualifies for CCA?

What Assets?
Individuals and corporations qualify for CCA
Can claim on:
all tangible assets other than land and
some but not all intangible assets.

To be eligible for CCA:

a)The taxpayer must have legal title; and
b)The asset must be available for use for the purpose of
earning income from business of investments.

Who Qualifies for CCA?

What Assets?
The total dollar amount available for allocation as CCA is
referred to as the capital cost of the asset.
The capital cost amount consists of:
the original purchase price plus
all costs incurred to bring the asset to working order.

B. Rates of Capital Cost Allowance

The Act assigns various types of assets to specific classes.
Each class has a specific rate attached to it.
signifies the maximum deductible in any year.

No requirement to claim this maximum:

can choose to claim any amount up to the maximum.

Unclaimed portions is available for deduction in future

years.

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C. The Declining Balance Method

CCA system uses the declining balance method.
with some exceptions, i.e. Class 13 & 14.

Applies a constant percentage to the remaining undepreciated portion of the original capital cost.
Each class of assets has a specific percentage rate
attached.
New assets limited by half-year rule.
some exceptions.

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C. The Declining Balance Method

CCA claim may be limited when a taxation year is less
than 365 days.
CCA is prorated by the number of days in the taxation
year divided by 365.

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Common Classes
Class 1
Buildings after 1987
4% declining balance
Additional allowance

Class 3
Buildings before 1988
5% declining balance

Class 8
Miscellaneous tangible (equipment, office furniture etc.)
20% declining balance

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Common Classes
Class 10
Vehicles
Movable equipment
30% declining balance

Class 10.1
Vehicles with cost greater than $30,000
30% Declining Balance

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Common Classes
Class 12
Small tools
Computer software
Dishes
Books
100% declining balance

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Common Classes
Class 29
Manufacturing equipment
Purchased between
March 19, 2007 to December 31, 2015
25% in first year, 50% in second and remainder in third.
Temporary

Class 38
Power-operated and movable equipment
Acquired after 1987
Used for excavating
30% declining balance
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Common Classes
Class 43
Manufacturing equipment
30% declining balance
See classes 29 and 53 also

Class 43.2
Clean energy generation equipment (i.e. solar panels)
Acquired after February 22, 2005 and before 2020
50% declining balance

Class 44
Patents After April 26, 1993
Can choose to use Class 14
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Common Classes
Class 46
Data network infrastructure equipment
30% declining balance

Class 50
Computer equipment and systems software
Acquired after January 31, 2011
55% declining balance

Class 53
Manufacturing equipment
Acquired after 2015 and before 2026
50% declining balance
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D. Pooling of Assets of the Same Class

Assets of the same class are placed in a common pool,
provided all used in the same business.

Pooling result is the asset loses its individual identity.

A purchase will add that a pool of assets.
A sale of an asset will remove it from the pool.

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D. Pooling of Assets of the Same Class

CCA on the undepreciated capital cost at the beginning of
the year is treated differently from CCA on net additions
(disposals).
The one-half rule applies only on net additions.
If disposals exceed purchases, no one-half rule.

When assets are sold, the CCA pool is reduced by lower

of
Original cost, or
Proceeds of disposition.

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Undepreciat Class 8
Example
ed Cost of
Capital

UCC beginning of year:

$70,000
Additions
60,000
Disposals (50,000) 10,000
$80,000
CCA
20% x $70,000 14,000
20% x $10,000 x 1,000
(15,000)
UCC
$65,000

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E. Gains and Losses on Disposal of

Depreciable Property
Generally:
Gains and losses remain in the pool, and
Are averaged over the life of the pool except when
Sale Price > Original Cost
A loss remains in the pool to be deducted in future year.

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E. Gains and Losses on Disposal of

Depreciable Property
Gains and losses can occur at three points:
1. Terminal Loss:
All assets in pool are disposed of and
Positive balance in the pool is written off
against business or property income

2. Recapture:
Negative balance left in a pool
regardless of whether there are assets left
Gain is fully taxable

3. Capital Gain

the selling price exceeds the original cost.

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F. Special Treatment of Passenger Vehicles

Passenger vehicles costing more than $30,000 are
placed in Class 10.1.
Class 10.1 limits the tax deduction for luxury cars.
Maximum claim is $30,000 regardless of cost
Assets are not pooled
No recapture or terminal loss when vehicle is sold
One-half rule
Applies in the year of acquisition
One-half of the CCA is claimable in disposal year.

Vehicles < $30,000 are placed in Class 10

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G. Special Treatment of Faxes,

Photocopiers and Manufacturing Assets
Equipment subject to rapid obsolescence.
Can elect to set up a separate class for each property
costing more than $1,000
Enable a taxpayer to recognize terminal losses on
disposal.
If these assets were pooled, the loss would be averaged
with the remaining assets.
May elect to place eligible manufacturing assets costing
more than $1,000 in a separate class of class 43 property
Does not apply to Class 45 assets
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H. Exceptions to the Declining Balance

Method

Two exceptions are as follows:

1. Leasehold Improvements
2. Franchises, Concessions, and Licenses

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1. Leasehold Improvements
Tenant is responsible for the cost of making the rented
space suitable to their needs.
Expenditures are:
tangible improvements to the rental property and,
at the end of the lease, cannot be removed.

Costs qualify as depreciable property (Class 13).

Allocated using the straight-line method over the life of
the lease plus one renewable option period.

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1. Leasehold Improvements
Minimum 5 years; maximum is 40 years.
Additional improvements are allocated over the remaining
term of the lease and one renewal period.
One-half rule applies to class 13.
Inducement payments:
May be recognized as either business income or
reduction of the cost of leasehold improvements.

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2. Franchises, Concessions, and Licences

Class 14 if have a limited legal life.
If unlimited life = eligible capital property

CCA is determined separately for each item.

The annual CCA:
straight-line basis based on number of days owned in the year
divided by the total number of days in the life of the asset.

The one-half rule is not applied to class 14 assets.

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I. Involuntary and Voluntary Dispositions

Recapture requirements is often a burden when
replacement assets are planned but not purchased in
same year.
Requires tax be paid in current year,
Even though replacing asset.

Involuntary disposition often triggers recapture.

Permitted to defer recognition of the recapture if
Similar use property within 24 months.

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I. Involuntary and Voluntary Dispositions

Voluntary dispositions can defer if:
Repurchased within 12 months, and
Building is used for the purpose of earning business income.

Year of disposition show recapture and pay relating tax.

Year of replacement file amended return to remove
recapture and receive a refund of tax paid.

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3. Change in Use
From Personal Use to Business Use:
Deemed disposition when occurs :
If FMV < Original Cost then
FMV is the proceeds of disposition and new cost
base for CCA.
If FMV> Original Cost then
FMV + taxable capital Gain is new cost base for
CCA.

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J. Change in Use
From Business Use to Personal Use:
A change in use from business use to personal use causes a
disposition at FMV

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K. Depreciable Property Acquired from NonArms Length Person

Non-arms length generally refers to related persons
(including corporations)
If purchase price > sellers cost
Seller has a capital gain; taxable
Capital cost reduced by the tax-free gain
Future CCA for the purchaser is based on the reduced
amount

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L. Terminal Loss Restriction on Sales to

Affiliated Persons
Terminal loss on transfer is denied (deemed to be nil)
Denied terminal loss remains with the seller
(notional property)
May claim CCA on the amount
Recognize the terminal loss on the notional property
when sold by affiliated person.
Affiliated Persons: individuals and spouse and any
corporation controlled by either.

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M. Cost of a Business Website

Cost normally includes the cost of design and writing
computer code
Can be considered application software
Class 12 - 100% CCA rate but subject to the year rule.

Computers acquired to host website.

Computer and systems software costs Class 50
CCA rate 55%

Ongoing reprogramming for maintenance, improvements,

etc. are current expenses and deducted in the year
incurred
Substantial alterations would be capital expenditures and
added to Class 12
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III. The Treatment of Class 14.1 and

Eligible Capital Property
Capital expenditure of an intangible nature and have no
specific legal life.
Prior to 2017, these expenditures were grouped together in
a single pool
Allocated as a deduction over a common, arbitrary time
period
Effective January 1, 2017, ECP expenditures are treated as
Class 14.1 depreciable property
Follow the standard CCA process
Balance of ECP will be transferred to class 14.1 on January
1, 2017
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A. Class 14.1 Defined

Capital expenditure of an intangible nature otherwise not
included in any other class
Some common types of expenditures are:
Goodwill (purchased).
Franchises, licences, and concessions with no legal limited
life.
Trademarks.
Customer lists.
Incorporation costs in excess of $3,000.

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B. Goodwill Defined
The value attributed to a business in excess of the
sum of the value of all other, specific assets.
Qualifies to the buyer as a Class 14.1 expenditure
Must be purchased

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C. Tax Treatment of Class 14.1 Depreciable

Property
Full cost is added to the UCC pool
CCA rate is 5%
One-half year rule applies on net additions (if
positive)
Dispositions may result in recapture and a capital
gain

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C. Tax Treatment of Class 14.1 Depreciable

Property
Certain items may not be identifiable properties
Cannot be sold separately
Ex. Incorporation costs

Non-identifiable properties are added to the class as

part of goodwill

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D. Basic Rules for Eligible Capital Property

For 2016 and previous years
All assets are pooled together.
Additions and disposals, regardless of original cost, are
recorded at 75%.
Annual rate of write-off is 7%.
One-half rule does not apply.
Proration is used for short taxation years.

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D. Basic Rules for Eligible Capital Property

Negative Pool:
Amount that represents recapture - add business income,
Amount greater than recapture - two-thirds of excess is
business income.

Positive Pool and business discontinues - terminal loss.

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E. Transfer of Eligible Capital Property to

Class 14.1
On January 1, 2017, eligible capital properties and
cumulative eligible capital tax amounts are
transferred to Class 14.1
Pre-2017 CEC may use an annual CCA rate of 7%
May use until the end of the 2026 taxation year
If using the 7% rate creates CCA less than $500 in any
eligible year, CCA is increased to $500

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E. Transfer of Eligible Capital Property to

Class 14.1
For calculating capital gains if property is sold, must
determine the total capital cost of transferred
property:
A. 4/3 of positive CEC balance at January 1, 2017
Plus

B. 4/3 of amounts previously deducted and not

recaptured
Less

C. 4/3 of negative CEC balance at January 1, 2017

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E. Transfer of Eligible Capital Property to

Class 14.1
Allocating the total capital cost:
First to specific identifiable properties
Normally the original capital cost amount

If total available cost is less than the sum of cost for

identifiable properties, taxpayer may choose the order
of properties
Any remaining amount is allocated to goodwill

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IV. Accounting Rules vs. Tax Rules

Cost allocation
GAAP:
Useful life to allocate capital costs
Requirements management estimates.

Tax:
CCA rates predetermined rates
Rates are determined on the basis of the average normal
use of particular types of assets.

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IV. Accounting Rules vs. Tax Rules

Gains and losses Depreciable Property
Accounting:
Gain or loss are recognized.

Tax purposes:
Only capital gains are recognized.
One-half of the capital gain is taxable.

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V. Impact on Management Decisions

The tax treatment of depreciable capital property and
eligible capital property has a significant impact on
management decisions.
A. The tax method of dealing with depreciable property influences
the rates and method of amortization/depreciation chosen by
Canadian businesses.
B. The way that capital costs are allocated and gains and losses
are treated influences the amount and timing of income tax,
which in turn affects cash flow and all decisions relating to
capital expansion.

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