Chapter 7

Capital Cost Allowances And

Cumulative Eligible Capital
General System
 ITA 18(1)(b)
 Prohibits Deduction Of Capital Costs
 ITA 20(1)(a)
 Permits Deduction Of CCA

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Tax Vs. Accounting
 Terminology
 CCA Vs. Amortization
 Capital Cost Vs. Cost
 UCC Vs. Net Book Value
 Additions
 Accounting – Individual
Assets
 Tax – Aggregated
Classes

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Tax Vs. Accounting
 Write-Offs
 Accounting
 Variety Of Methods
 Applied Consistently
 Tax
 Declining Balance
(Some Straight-Line)
 Maximum Specified
(Consistency Not Required)

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Tax Vs. Accounting
 Dispositions
 Accounting
 Proceeds Less NBV =
Gain (Loss)
 Individual Assets
 Tax
 Subtract POD From
Class
 Recapture, Terminal
Loss, Capital Gain, Or
No Tax Effect

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Additions
 General Rules
 Capital Assets Only
 Usual Accounting Additions
 Capitalization Of Interest
 Government Assistance
 Non-Arm’s Length Transactions
 GST Considerations
 Rollover Provisions
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Additions
 Available For Use Rules
 General Criteria
 First Used By Taxpayer
 2nd Taxation Year After Year Of Acquisition
 Public Companies: First Year Amortization Is Taken
 Vehicles: Licence Acquisition
 Rules For Buildings
 Substantially All (90 percent) Used
 2nd Taxation Year After Year Of Acquisition
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Segregation Into Classes
 Importance
 Class 12 At 100%
 Class 1 At 4%
 Mistakes Are Costly

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Capital Cost Allowances
 Methods And Rates
 Declining Balance Classes - ITR 1100(1)(a)
 Straight-Line Classes
 13
 14
 24, 27, 29, 34

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2007 Budget Proposals
 Buildings – Class 1
 M & P: Extra 6 Percent
 Other Non-Residential: Extra 2 Percent
 Computer Equipment: New 55 Percent Class
 M & P Equipment: Straight-Line Over 2
Years

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Common Classes
 Class 1
 Buildings After 1987
 4% Declining Balance
 Class 3
 Buildings Before 1988
 5% Declining Balance

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Common Classes
 Class 8
 Miscellaneous
Tangible
 20% Declining Balance

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Common Classes
 Class 10
 Vehicles
 Computers Acquired Before March 22, 2004
 Systems Software Acquired Before March 22,
2004
 30% Declining Balance

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Common Classes
 Class 10.1
 Vehicles With Cost
Greater Than $30,000
 30% Declining Balance

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Common Classes
 Class 12
 Tools
 Computer Software
 Dishes
 Books
 100% Declining Balance

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Common Classes
 Class 13
 Leasehold Improvements
 Lease Term, Plus One
Renewal
 Between 5 And 40 Years
 Each Expenditure Separate

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Common Classes
 Class 14
 Limited Life Intangibles
 Straight-Line Over Legal Life
 Pro Rata On Days After
Acquisition Or Before
Disposition
 Patents To Class 44

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Common Classes
 Class 43
 Manufacturing Equipment
 30% Declining Balance

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Common Classes
 Class 44
 Patents After April 26, 1993
 Can Choose To Use Class 14

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Common Classes
 Class 45
 Computer Hardware And Systems Software
 Acquired After March 22, 2004
 45% Declining Balance

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Capital Cost Allowances
 First Year Rules - ITR 1100(2)
 1. Application
 The Problem
 The Solution
 2. Exceptions
 All Of Class 14
 Part Of Class 12
 Non-Arm’s Length Acquisitions

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Capital Cost Allowances
 Short Fiscal Periods
 Rule
 Pro Rata Based On Number Of Days
 Application
 First And Last Year Of Operation
 Deemed Year Ends
 Does Not Apply To Classes 14 or 15

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Capital Cost Allowances
 Tax Planning Considerations:
Loser Company has Net Income before the
deduction of CCA of $10,000. It has UCC of
$300,000 in Class 1 and $300,000 in Class
10.
 Max CCA @ 4% = $12,000
 Max CCA @ 30% = $90,000
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Dispositions Of Capital Assets
 General Rules
 1. POD < Capital Cost
 Deduct POD From UCC
 2. POD > Capital Cost
 Deduct Capital Cost From
UCC
 Excess Is Capital Gain

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Capital Gains
 If POD > Capital Cost
 Will generally be accompanied by recapture
 No capital losses on depreciable assets

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Recapture
Example: Two assets in class with a cost of $50,000
each. CCA for five years equals $63,136, leaving a
UCC of $36,864.
• Sell One Asset For $40,000
$36,864 - $40,000 = ($3,136)
• Sell One Asset For $60,000
$36,864 - $50,000 = ($13,136)
Capital Gain = $10,000

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Terminal Loss
Example: Two assets in class with a cost of $50,000
each. CCA for five years equals $63,136, leaving a
UCC of $36,864.
• Sell Both Assets For $20,000
$36,864 - $20,000 = $16,864

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Separate Classes
 Separate Classes - ITR 1101
 Separate Businesses
 Car Dealership And Grocery Store Will Have
Separate Class 8 Balances
 Cars With Cost > $30,000
 No Recapture
 No Terminal Loss
 1/2 Year’s CCA In Year Of Disposition

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Separate Classes
 Separate Classes - ITR 1101
 Rental Properties With Cost > $50,000
 If All Rental Properties In Same Class,
Replacement Would Avoid Recapture
 Space Satellites
 Certified Canadian Films

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Separate Classes
 Separate Classes Election
 Certain Class 8, 10, And 12 Assets
 Photocopiers
 Telephone Systems
 Provides For Recognition Of Terminal Losses

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Special Rules For Buildings
 Applies when capital gain on land (1/2
taxable), combined with terminal loss on
building (fully deductible)
 Requires re-allocation of proceeds to
minimize terminal loss

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Involuntary Dispositions
Example Fire destroys a building. It has a cost of $500,000 and
a UCC of $300,000. Insurance proceeds of $500,000 are received
in the following year. They are used to replace the building at a
cost of $600,000.

Current Return: $200,000 Recapture

• Following Year Return: Amended Return Reverses
Recapture
• New UCC: $600,000 - $200,000 = $400,000
• Timing

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Voluntary Dispositions

 Limited To Real Property

 Must Be Within One Year

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Change In Use
 Personal To Business
 Cost > FMV: Dispose/Acquire At FMV
 Cost < FMV: Dispose/Acquire At Cost Plus
One-Half Of Excess
 Business To Personal
 Dispose/Acquire At FMV

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Cumulative Eligible Capital
 Eligible Capital Expenditures Defined:
IT-143R2
 Goodwill
 Trademarks
 Unlimited Life Franchises
 Appraisal Costs On Assets To Be Used
 Corporate Organization Costs

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Additions
 Additions

 Limited To 3/4 Of Cost

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Amortization
 Amortization
 ITA 20(1)(b) Specifies 7 Percent
 Declining Balance
 No First Year Rules

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Dispositions
 Dispositions
 Deduct 3/4 Of POD (Ignore Cost)
 “Recapture”
 “Capital Gain”

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Disposal Election
 Problem
 If large CEC pool, could not recognize capital
gains (cost ignored on dispositions)
 Prevented recognition of capital losses
 ITA 14(1.01) allows separate treatment of
individual items and recognition of capital
gains

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Special Situations
 Special Situations
 Death Of A Taxpayer

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Special Situations
 Special Situations
 Replacement Properties

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