Post on 12-Apr-2015
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Prepared byPrepared byKen HartviksenKen Hartviksen
INTRODUCTION TOINTRODUCTION TO CORPORATE FINANCECORPORATE FINANCELaurence Booth Laurence Booth •• W. Sean Cleary W. Sean Cleary
Capital Cost AllowanceCapital Cost Allowance
Capital Cost AllowanceCapital Cost Allowance
Capital Cost Allowance A - 3
Lecture AgendaLecture Agenda
• Learning ObjectivesLearning Objectives• Important TermsImportant Terms• What is Capital Cost Allowance?What is Capital Cost Allowance?• Importance of CCAImportance of CCA• CCA versus Accounting DepreciationCCA versus Accounting Depreciation• CCA rulesCCA rules• Use of CRAs CCA FormUse of CRAs CCA Form• Recapture, Terminal loss and Capital gain on DisposalRecapture, Terminal loss and Capital gain on Disposal• Summary and ConclusionsSummary and Conclusions
Capital Cost Allowance A - 4
Learning ObjectivesLearning Objectives
• How the capital cost allowance (CCA) system worksHow the capital cost allowance (CCA) system works• The differences between accounting depreciation and CCAThe differences between accounting depreciation and CCA• How to use the CRA CCA scheduleHow to use the CRA CCA schedule• How to identify recapture, terminal loss and capital gains How to identify recapture, terminal loss and capital gains
when assets are soldwhen assets are sold• The tax treatment of capital gains, terminal losses and The tax treatment of capital gains, terminal losses and
recapture.recapture.
Capital Cost Allowance A - 5
Important TermsImportant Terms
• Capital Cost Allowance Capital Cost Allowance (CCA)(CCA)
• Capital gainCapital gain• Capital lossCapital loss• Cash flow from Cash flow from
operationsoperations• Cash flow statementCash flow statement• CCA recaptureCCA recapture• DepreciationDepreciation
• Generally accepted Generally accepted accounting principles accounting principles (GAAP)(GAAP)
• Half-year ruleHalf-year rule• Operating lossOperating loss• Terminal lossTerminal loss• Undepreciated capital cost Undepreciated capital cost
(UCC)(UCC)
Capital Cost Allowance A - 6
CCACCA
• Capital Cost Allowance (CCA) is the Capital Cost Allowance (CCA) is the ‘depreciation’ method used by taxpayers in ‘depreciation’ method used by taxpayers in Canada when reporting business income to Canada when reporting business income to CRA Canada Revenue Agency for tax CRA Canada Revenue Agency for tax purposes.purposes.
Capital Cost Allowance A - 7
Importance of CCA to Financial Importance of CCA to Financial DecisionsDecisions
• Taxation issues must be explicitly addressed Taxation issues must be explicitly addressed in each financial decision you make.in each financial decision you make.
• Since CCA affects the net income from a Since CCA affects the net income from a business (and especially affects net cash business (and especially affects net cash flow), knowledge of the CCA system is flow), knowledge of the CCA system is essential for all business decision-makers.essential for all business decision-makers.
Capital Cost Allowance A - 8
CCA gives rise to a ‘Tax Shield Benefit’ to CCA gives rise to a ‘Tax Shield Benefit’ to the Companythe Company
• CCA is a CCA is a non-cashnon-cash deduction from income that would otherwise deduction from income that would otherwise be subject to income taxation.be subject to income taxation.
• As a result of the CCA deduction, taxable income is reduced.As a result of the CCA deduction, taxable income is reduced.• This results in a savings in tax payable.This results in a savings in tax payable.• The tax shield benefits is equal to: T(CCA)The tax shield benefits is equal to: T(CCA)
t = corporate tax ratet = corporate tax rate
CCA = the dollar amount of CCA claimedCCA = the dollar amount of CCA claimed• A firm with a 40% corporate tax rate and a $2,000 CCA A firm with a 40% corporate tax rate and a $2,000 CCA
deduction will save $800 in taxes.deduction will save $800 in taxes.
$800 $2,00040%
CCA RateTax Corporate CCA on SavingsTax
Capital Cost Allowance A - 9
Example:Example:Consider two firms that report $10,000 in earnings before CCA and taxes, face a 40% tax rate. One firm Consider two firms that report $10,000 in earnings before CCA and taxes, face a 40% tax rate. One firm
has no CCA to claim, the other can claim $2,000 in CCAhas no CCA to claim, the other can claim $2,000 in CCA
Company ACompany A Company BCompany BEarnings Before CCA & TaxEarnings Before CCA & Tax $10,000$10,000 $10,000$10,000
CCACCA 2,000 2,000 0 0
Taxable IncomeTaxable Income $ 8,000$ 8,000 $ 10,000$ 10,000
Taxes @ 40%Taxes @ 40% 3,2003,200 4,0004,000
Net IncomeNet Income $ 4,800$ 4,800 $ 6,000$ 6,000
Add back non-cash expenseAdd back non-cash expense 2,0002,000 0 0
Cash flow from OperationsCash flow from Operations $ 6,800$ 6,800 $ 6,000$ 6,000
Note that company A is better off by $800 because of the $2,000 non-cash deduction of CCA. That is the amount of taxes saved.
If you look at net income, Company A appears to be worse off, however, that is only an accounting illusion!!
Note that company A is better off by $800 because of the $2,000 non-cash deduction of CCA. That is the amount of taxes saved.
If you look at net income, Company A appears to be worse off, however, that is only an accounting illusion!!
Capital Cost Allowance A - 10
CCA vs. Accounting DepreciationCCA vs. Accounting Depreciation
CCACCA• like assets are grouped like assets are grouped
into pools or classesinto pools or classes• the CCA rate used in each the CCA rate used in each
asset class is setout in the asset class is setout in the regulations to the Income regulations to the Income Tax Act and may or may Tax Act and may or may not reflect economic not reflect economic wastage of the assetwastage of the asset
• no estimate of useful life no estimate of useful life or of salvage valueor of salvage value
• as long as the firm as long as the firm remains in existence, and remains in existence, and assets remain in the pool, assets remain in the pool, residual UCC values will residual UCC values will remain in the pool.remain in the pool.
Accounting DepreciationAccounting Depreciation• choose the method that choose the method that
will best represent the will best represent the economic wastage of the economic wastage of the asset (declining balance, asset (declining balance, sum-of-the-year’s digits, sum-of-the-year’s digits, straight-line, etc.)straight-line, etc.)
• individual assets are individual assets are depreciateddepreciated
• estimate of useful life and estimate of useful life and salvage value is includedsalvage value is included
Capital Cost Allowance A - 11
CCA RulesCCA Rules
• 1/2 of the regular CCA rate for the class 1/2 of the regular CCA rate for the class applies to the net additions to the pool for applies to the net additions to the pool for that year.that year.
• CCA cannot be used to create a tax loss.CCA cannot be used to create a tax loss.
Capital Cost Allowance A - 12
CCA Over Time - A Simple ExampleCCA Over Time - A Simple ExampleAssume you acquire a depreciable asset with a cost base of $100,000 and there are no Assume you acquire a depreciable asset with a cost base of $100,000 and there are no other assets in this pool. The CCA rate for the pool is 10%. Note you are allowed only other assets in this pool. The CCA rate for the pool is 10%. Note you are allowed only
1/2 the regular CCA rate on the net additions to the pool in the year of acquisition.1/2 the regular CCA rate on the net additions to the pool in the year of acquisition.
Year UCC of pool Addition CCA @ 10%1 0 100000 50002 95000 0 95003 85500 0 85504 76950 0 7695
etc.
Capital Cost Allowance A - 13
CCA Tax Shield Over TimeCCA Tax Shield Over Time(Assume a corporate Tax Rate ‘T’ of 40%)(Assume a corporate Tax Rate ‘T’ of 40%)
Year UCC of pool Addition CCA @ 10% T(CCA)1 0 100,000 5,000 2,0002 95,000 0 9,500 3,8003 85,500 0 8,550 3,4204 76,950 0 7,695 3,0785 69,255 0 6,926 2,7706 62,330 0 6,233 2,4937 56,097 0 5,610 2,2448 50,487 0 5,049 2,0199 45,438 0 4,544 1,818
Capital Cost Allowance A - 14
Tax Shield Over TimeTax Shield Over Time(A Graphical Representation)(A Graphical Representation)
0500
1000150020002500300035004000
Tax Shield
1 3 5 7 9 11 13 15 17 19
Year
T(CCA) at 10% on $100,000
Asymptotic Curve
Capital Cost Allowance A - 15
ObservationsObservations
• In the foregoing you can now readily see:In the foregoing you can now readily see: CCA provides large tax shields in the early years of the CCA provides large tax shields in the early years of the
asset’s lifeasset’s life residual values remain in the pool long after the asset was residual values remain in the pool long after the asset was
acquired…this means that the firm will never fully recoup the acquired…this means that the firm will never fully recoup the original cost of the asset … as the firm’s asset base ages, original cost of the asset … as the firm’s asset base ages, cash flows generated from CCA will not enable the firm to cash flows generated from CCA will not enable the firm to replace the original asset.replace the original asset.
• If a capital intensive firm were to pay out all of its If a capital intensive firm were to pay out all of its earnings in the form of dividends, there would not be earnings in the form of dividends, there would not be sufficient cash flow left to replenish the asset base that sufficient cash flow left to replenish the asset base that is wearing out… eventually the firm would go out of is wearing out… eventually the firm would go out of business … its physical assets would be worthless and business … its physical assets would be worthless and UCC would remain on it’s books!UCC would remain on it’s books!
Capital Cost Allowance A - 16
Disposition of Assets and CCADisposition of Assets and CCA
• A taxable capital gain would occur if the firm A taxable capital gain would occur if the firm sold a depreciable asset for greater than it’s sold a depreciable asset for greater than it’s original cost.original cost.
Capital Gain = Original Cost Base - Salvage ValueCapital Gain = Original Cost Base - Salvage Value
Capital Cost Allowance A - 17
Disposition of Assets and CCADisposition of Assets and CCA
• If the salvage value of the asset exceeds the UCC of If the salvage value of the asset exceeds the UCC of the the poolpool there is a recapture of depreciation there is a recapture of depreciation
• recaptured depreciation is subject to taxrecaptured depreciation is subject to tax
Recaptured Depreciation = UCCRecaptured Depreciation = UCCpool pool - Salvage Value- Salvage Value
Capital Cost Allowance A - 18
Disposition of Assets and CCADisposition of Assets and CCA
• When the last physical asset in the pool is sold and not When the last physical asset in the pool is sold and not replaced, the pool will be closed out. replaced, the pool will be closed out.
• If there is a positive balance remaining in the pool If there is a positive balance remaining in the pool after disposition, that balance is called a after disposition, that balance is called a terminal lossterminal loss and is deductible from income in that year….it is a and is deductible from income in that year….it is a non-cash deduction just like CCA.non-cash deduction just like CCA.
Capital Cost Allowance A - 19
CRA FormCRA Form
1 Class
number
2 Undepreciated
capital cost (UCC) at the start of the
year
3 Cost of
additions in the year
4 Proceeds of dispositions in the year
5 UCC
after additions and
dispositions (col. 2 plus 3
minus 4)
6 Adjustments for
current year additions (1/2 times (col. 3 minues 4)) If
negative, enter "0"
7 Base amount
for capital cost
allow ance (col. 5 minus
6)
8 Rate %
9 CCA
for the year (col. 7 times
8 or an adjusted amount)
10 UCC at the end of the
year (col. 5 minus 9)
6 91,874.00 32,880.00 25,000.00 99,754.00 3,940.00 95,814.00 0.1 9,581.40 90,172.606 90,172.60 11,900.00 54,008.00 48,064.60 0.00 48,064.60 0.1 4,806.46 43,258.14
TOTAL CCA = 14,387.86TAX SAVINGS = 3,596.97
Capital Cost Allowance A - 20
Capital Cost Allowance - Depreciation for Capital Cost Allowance - Depreciation for tax purposestax purposes
Class Rate Assets
1 4% Buildings acquired after 1987
8 20% Furniture, photocopiers
10 30% Vans, trucks, tractors and computers
13 Straight-line Leasehold improvements
16 40% Taxicabs and rental cars
22 50% Pollution control equipment
43 30% Manufacturing equipment
Capital Cost Allowance A - 21
CCA Schedule (simple)CCA Schedule (simple)
1 Class
number
2 Undepreciated
capital cost (UCC) at the start of the
year
3 Cost of
additions in the year
4 Proceeds of
dispositions in the year (Use the low er of Original cost
or selling price)
5 UCC
after additions and
dispositions (col. 2 plus 3
minus 4)
6 Adjustments for
current year additions (1/2 times (col. 3 minues 4)) If
negative, enter "0"
7 Base amount
for capital cost allow ance
(col. 5 minus 6)
8 Rate %
9 CCA
for the year (col. 7 times
8 or an adjusted amount)
10 UCC at the end of the
year (col. 5 minus 9)
6 10,000.00 0.00 0.00 10,000.00 0.00 10,000.00 0.1 1,000.00 9,000.00
Capital Cost Allowance A - 22
CCA Schedule (simple over time)CCA Schedule (simple over time)
1 Class
number
2 Undepreciated
capital cost (UCC) at the start of the
year
3 Cost of
additions in the year
4 Proceeds of
dispositions in the year (Use the low er of Original cost
or selling price)
5 UCC
after additions and
dispositions (col. 2 plus 3
minus 4)
6 Adjustments for
current year additions (1/2 times (col. 3 minues 4)) If
negative, enter "0"
7 Base amount
for capital cost allow ance
(col. 5 minus 6)
8 Rate %
9 CCA
for the year (col. 7 times
8 or an adjusted amount)
10 UCC at the end of the
year (col. 5 minus 9)
6 10,000.00 0.00 0.00 10,000.00 0.00 10,000.00 0.1 1,000.00 9,000.00 9,000.00 0.00 0.00 9,000.00 0.00 9,000.00 0.1 900.00 8,100.00
8,100.00 0.00 0.00 8,100.00 0.00 8,100.00 0.1 810.00 7,290.007,290.00 0.00 0.00 7,290.00 0.00 7,290.00 0.1 729.00 6,561.00
Capital Cost Allowance A - 23
CCA Schedule (simple – ½ net additions CCA Schedule (simple – ½ net additions rule)rule)
Year
1
Class number
2
Undepreciated capital cost (UCC) at the start of the
year
3
Cost of additions in
the year
4
Proceeds of dispositions in the year (Use the low er of Original cost
or selling price)
5
UCC af ter additions
and dispositions (col. 2 plus 3
minus 4)
6
Adjustments for current year
additions (1/2 times (col. 3 minues 4)) If
negative, enter "0"
7
Base amount for capital cost
allow ance (col. 5 minus
6)
8
Rate %
9
CCA for the year (col. 7 times
8 or an adjusted amount)
10
UCC at the end of the year
(col. 5 minus 9)
20XX 6 0.00 20,000.00 0.00 20,000.00 10,000.00 10,000.00 0.1 1,000.00 19,000.0020X1 6 19,000.00 0.00 0.00 19,000.00 0.00 19,000.00 0.1 1,900.00 17,100.0020X2 6 17,100.00 0.00 0.00 17,100.00 0.00 17,100.00 0.1 1,710.00 15,390.00
The ‘bottom line’ here is that you are allowed only half the regular CCA on additions to the pool in the year of acquisition.
The ‘bottom line’ here is that you are allowed only half the regular CCA on additions to the pool in the year of acquisition.
Capital Cost Allowance A - 24
CCA Schedule (simple – ½ net additions CCA Schedule (simple – ½ net additions rule)rule)
Year
1
Class number
2
Undepreciated capital cost (UCC) at the start of the
year
3
Cost of additions in
the year
4
Proceeds of dispositions in the year (Use the low er of Original cost
or selling price)
5
UCC af ter additions
and dispositions (col. 2 plus 3
minus 4)
6
Adjustments for current year
additions (1/2 times (col. 3 minues 4)) If
negative, enter "0"
7
Base amount for capital cost
allow ance (col. 5 minus
6)
8
Rate %
9
CCA for the year (col. 7 times
8 or an adjusted amount)
10
UCC at the end of the year
(col. 5 minus 9)
20XX 6 0.00 20,000.00 10,000.00 10,000.00 5,000.00 5,000.00 0.1 500.00 9,500.0020X1 6 9,500.00 0.00 0.00 9,500.00 0.00 9,500.00 0.1 950.00 8,550.0020X2 6 8,550.00 0.00 0.00 8,550.00 0.00 8,550.00 0.1 855.00 7,695.00
A ‘net addition’ to the pool is equal to additions minus disposals.A ‘net addition’ to the pool is equal to additions minus disposals.
Capital Cost Allowance A - 25
CCA Schedule (simple – changes over CCA Schedule (simple – changes over time)time)
Year
1
Class number
2
Undepreciated capital cost (UCC) at the start of the
year
3
Cost of additions in
the year
4
Proceeds of dispositions in the year (Use the low er of Original cost
or selling price)
5
UCC af ter additions
and dispositions (col. 2 plus 3
minus 4)
6
Adjustments for current year
additions (1/2 times (col. 3 minues 4)) If
negative, enter "0"
7
Base amount for capital cost
allow ance (col. 5 minus
6)
8
Rate %
9
CCA for the year (col. 7 times
8 or an adjusted amount)
10
UCC at the end of the year
(col. 5 minus 9)
20XX 6 10,000.00 0.00 0.00 10,000.00 0.00 10,000.00 0.1 1,000.00 9,000.0020X1 6 9,000.00 0.00 0.00 9,000.00 0.00 9,000.00 0.1 900.00 8,100.0020X2 6 8,100.00 0.00 0.00 8,100.00 0.00 8,100.00 0.1 810.00 7,290.00
Capital Cost Allowance A - 26
CCA Schedule (simple – changes over CCA Schedule (simple – changes over time)time)
Year
1
Class number
2
Undepreciated capital cost (UCC) at the start of the
year
3
Cost of additions in
the year
4
Proceeds of dispositions in the year (Use the low er of Original cost
or selling price)
5
UCC af ter additions
and dispositions (col. 2 plus 3
minus 4)
6
Adjustments for current year
additions (1/2 times (col. 3 minues 4)) If
negative, enter "0"
7
Base amount for capital cost
allow ance (col. 5 minus
6)
8
Rate %
9
CCA for the year (col. 7 times
8 or an adjusted amount)
10
UCC at the end of the year
(col. 5 minus 9)
20XX 6 0.00 10,000.00 0.00 10,000.00 5,000.00 5,000.00 0.1 500.00 9,500.0020X1 6 9,500.00 0.00 0.00 9,500.00 0.00 9,500.00 0.1 950.00 8,550.0020X2 6 8,550.00 0.00 0.00 8,550.00 0.00 8,550.00 0.1 855.00 7,695.00
Compare this slide with the last one…note that the CCA in the first year is half as great as in the last slide…because there was a net addition to the pool of $10,000 and no beginning UCC.
Compare this slide with the last one…note that the CCA in the first year is half as great as in the last slide…because there was a net addition to the pool of $10,000 and no beginning UCC.
Capital Cost Allowance A - 27
CCA Schedule (Disposals)CCA Schedule (Disposals)
Year
1
Class number
2
Undepreciated capital cost (UCC) at the start of the
year
3
Cost of additions in
the year
4
Proceeds of dispositions in the year (Use the low er of Original cost
or selling price)
5
UCC af ter additions
and dispositions (col. 2 plus 3
minus 4)
6
Adjustments for current year
additions (1/2 times (col. 3 minues 4)) If
negative, enter "0"
7
Base amount for capital cost
allow ance (col. 5 minus
6)
8
Rate %
9
CCA for the year (col. 7 times
8 or an adjusted amount)
10
UCC at the end of the year
(col. 5 minus 9)
20XX 6 0.00 10,000.00 0.00 10,000.00 5,000.00 5,000.00 0.1 500.00 9,500.0020X1 6 9,500.00 0.00 0.00 9,500.00 0.00 9,500.00 0.1 950.00 8,550.0020X2 6 8,550.00 0.00 5,000.00 3,550.00 0.00 3,550.00 0.1 355.00 3,195.00
When you dispose of assets from the pool remember…that you are not allowed ANY CCA on the asset that has been disposed of even though you might have used the asset for the greater part of the fiscal year.
When you dispose of assets from the pool remember…that you are not allowed ANY CCA on the asset that has been disposed of even though you might have used the asset for the greater part of the fiscal year.
Capital Cost Allowance A - 28
CCA Schedule – changes over timeCCA Schedule – changes over time
Year
1
Class number
2
Undepreciated capital cost (UCC) at the start of the
year
3
Cost of additions in
the year
4
Proceeds of dispositions in the year (Use the low er of Original cost
or selling price)
5
UCC af ter additions
and dispositions (col. 2 plus 3
minus 4)
6
Adjustments for current year
additions (1/2 times (col. 3 minues 4)) If
negative, enter "0"
7
Base amount for capital cost
allow ance (col. 5 minus
6)
8
Rate %
9
CCA for the year (col. 7 times
8 or an adjusted amount)
10
UCC at the end of the year
(col. 5 minus 9)
20XX 6 0.00 25,500.00 0.00 25,500.00 12,750.00 12,750.00 0.1 1,275.00 24,225.0020X1 6 24,225.00 10,000.00 4,000.00 30,225.00 3,000.00 27,225.00 0.1 2,722.50 27,502.5020X2 6 27,502.50 0.00 2,000.00 25,502.50 0.00 25,502.50 0.1 2,550.25 22,952.25
Capital Cost Allowance A - 29
CCA Schedule – RecaptureCCA Schedule – Recapture
Year
1
Class number
2
Undepreciated capital cost (UCC) at the start of the
year
3
Cost of additions in
the year
4
Proceeds of dispositions in the year (Use the low er of Original cost
or selling price)
5
UCC af ter additions
and dispositions (col. 2 plus 3
minus 4)
6
Adjustments for current year
additions (1/2 times (col. 3 minues 4)) If
negative, enter "0"
7
Base amount for capital cost
allow ance (col. 5 minus
6)
8
Rate %
9
CCA for the year (col. 7 times
8 or an adjusted amount)
10
UCC at the end of the year
(col. 5 minus 9)
20XX 6 0.00 25,500.00 0.00 25,500.00 12,750.00 12,750.00 0.1 1,275.00 24,225.0020X1 6 24,225.00 10,000.00 4,000.00 30,225.00 3,000.00 27,225.00 0.1 2,722.50 27,502.5020X2 6 27,502.50 0.00 30,000.00 -2,497.50 0.00 0.00 0.1 0.00 -2,497.50
If the proceeds on the sale of an asset in the pool cause the balance in the pool to become negative…that negative amount is a recapture of depreciation.
If the proceeds on the sale of an asset in the pool cause the balance in the pool to become negative…that negative amount is a recapture of depreciation.
Capital Cost Allowance A - 30
Recapture of DepreciationRecapture of Depreciation
• A recapture is ‘realized’ on the disposal of an asset in a A recapture is ‘realized’ on the disposal of an asset in a CCA pool where the remaining balance in the pool turns CCA pool where the remaining balance in the pool turns negative….essentially this arises because the negative….essentially this arises because the government has allowed you to depreciate for tax government has allowed you to depreciate for tax purposes the equipment at too great a rate.purposes the equipment at too great a rate.
• When you sold the equipment…the selling price did not When you sold the equipment…the selling price did not reflect the ‘depreciated value’…the selling price reflect the ‘depreciated value’…the selling price exceeded not only the depreciated value of the exceeded not only the depreciated value of the individual asset…but if other assets remain in the pool, individual asset…but if other assets remain in the pool, the selling price has exceeded the depreciated (or UCC) the selling price has exceeded the depreciated (or UCC) of all of the assets remaining in the pool.of all of the assets remaining in the pool.
• You will have to claim the recapture as income in the You will have to claim the recapture as income in the fiscal year that it was realized…and pay income taxes on fiscal year that it was realized…and pay income taxes on it.it.
Capital Cost Allowance A - 31
CCA Schedule – Terminal LossCCA Schedule – Terminal Loss
Year
1
Class number
2
Undepreciated capital cost (UCC) at the start of the
year
3
Cost of additions in
the year
4
Proceeds of dispositions in the year (Use the low er of Original cost
or selling price)
5
UCC af ter additions
and dispositions (col. 2 plus 3
minus 4)
6
Adjustments for current year
additions (1/2 times (col. 3 minues 4)) If
negative, enter "0"
7
Base amount for capital cost
allow ance (col. 5 minus
6)
8
Rate %
9
CCA for the year (col. 7 times
8 or an adjusted amount)
10
UCC at the end of the year
(col. 5 minus 9)
20XX 6 10,000.00 0.00 5,000.00 5,000.00 0.00 5,000.00 0.1 500.00 4,500.0020X1 6 0.00 0.00 0.00 0.00 0.00 0.00 0.1 0.00 0.0020X2 6 0.00 0.00 0.00 0.00 0.00 0.00 0.1 0.00 0.00
If the LAST physical asset in the asset class was finally sold for $5,000, and $4,250 was left in the pool…the $4,250 is a ‘terminal loss’.
If the LAST physical asset in the asset class was finally sold for $5,000, and $4,250 was left in the pool…the $4,250 is a ‘terminal loss’.
Capital Cost Allowance A - 32
Terminal Losses are RareTerminal Losses are Rare
• These are usually pretty rare in practice…These are usually pretty rare in practice…because, generally when old assets are worn because, generally when old assets are worn out…they are replaced…and therefore, there out…they are replaced…and therefore, there remain physical assets in the pool.remain physical assets in the pool.
• Only if a firm is getting out of a line of Only if a firm is getting out of a line of business…and disposing of all of their assets business…and disposing of all of their assets (or perhaps deciding to lease them all instead (or perhaps deciding to lease them all instead of owning them)…can you imagine a firm of owning them)…can you imagine a firm disposing of all of the assets in an asset pool.disposing of all of the assets in an asset pool.
Capital Cost Allowance A - 33
Tax Treatment of Terminal LossesTax Treatment of Terminal Losses
• In essence, a residual value left in the pool after the sale In essence, a residual value left in the pool after the sale of the last physical asset…can only occur if the sale of the last physical asset…can only occur if the sale value of the assets (disposal values) were less than the value of the assets (disposal values) were less than the UCC of the assets…this means that over time, the UCC of the assets…this means that over time, the government’s CCA rate did not reflect the true ‘wastage’ government’s CCA rate did not reflect the true ‘wastage’ of the assets.of the assets.
• Consequently, a terminal loss can be deducted from Consequently, a terminal loss can be deducted from income (just like regular CCA)income (just like regular CCA)
• Since a terminal loss is a non-cash deduction (like CCA) Since a terminal loss is a non-cash deduction (like CCA) it will give rise to a tax shield (Tax shield = terminal loss it will give rise to a tax shield (Tax shield = terminal loss times the corporate tax rate)times the corporate tax rate)
Capital Cost Allowance A - 34
CCA Schedule – Capital GainCCA Schedule – Capital Gain
Year
1
Class number
2
Undepreciated capital cost (UCC) at the start of the
year
3
Cost of additions in
the year
4
Proceeds of dispositions in the year (Use the low er of Original cost
or selling price)
5
UCC af ter additions
and dispositions (col. 2 plus 3
minus 4)
6
Adjustments for current year
additions (1/2 times (col. 3 minues 4)) If
negative, enter "0"
7
Base amount for capital cost
allow ance (col. 5 minus
6)
8
Rate %
9
CCA for the year (col. 7 times
8 or an adjusted amount)
10
UCC at the end of the year
(col. 5 minus 9)
20XX 6 40,000.00 0.00 0.00 40,000.00 0.00 40,000.00 0.1 4,000.00 36,000.0020X1 6 36,000.00 0.00 0.00 36,000.00 0.00 36,000.00 0.1 3,600.00 32,400.0020X2 6 32,400.00 0.00 16,500.00 15,900.00 0.00 15,900.00 0.1 1,590.00 14,310.00
You sell an asset for $20,000 that originally cost you $16,500, you would use the lower of the two values to record this disposal for CCA purposes.
You sell an asset for $20,000 that originally cost you $16,500, you would use the lower of the two values to record this disposal for CCA purposes.
Capital Cost Allowance A - 35
CCA Schedule – Capital Gain and a CCA Schedule – Capital Gain and a RecaptureRecapture
Year
1
Class number
2
Undepreciated capital cost (UCC) at the start of the
year
3
Cost of additions in
the year
4
Proceeds of dispositions in the year (Use the low er of Original cost
or selling price)
5
UCC af ter additions
and dispositions (col. 2 plus 3
minus 4)
6
Adjustments for current year
additions (1/2 times (col. 3 minues 4)) If
negative, enter "0"
7
Base amount for capital cost
allow ance (col. 5 minus
6)
8
Rate %
9
CCA for the year (col. 7 times
8 or an adjusted amount)
10
UCC at the end of the year
(col. 5 minus 9)
20XX 6 16,500.00 0.00 0.00 16,500.00 0.00 16,500.00 0.1 1,650.00 14,850.0020X1 6 14,850.00 0.00 0.00 14,850.00 0.00 14,850.00 0.1 1,485.00 13,365.0020X2 6 13,365.00 0.00 16,500.00 -3,135.00 0.00 0.00 0.1 0.00 -3,135.00
You sell an asset for $20,000 that originally cost you $16,500, you would use the lower of the two values to record this disposal for CCA purposes. If the sale causes the UCC to become negative…a recapture of depreciation will also be
triggered by the transaction.
You sell an asset for $20,000 that originally cost you $16,500, you would use the lower of the two values to record this disposal for CCA purposes. If the sale causes the UCC to become negative…a recapture of depreciation will also be
triggered by the transaction.
Capital Cost Allowance A - 36
CCA Schedule templateCCA Schedule template
Year
1
Class number
2
Undepreciated capital cost (UCC) at the start of the
year
3
Cost of additions in
the year
4
Proceeds of dispositions in the year (Use the low er of Original cost
or selling price)
5
UCC af ter additions
and dispositions (col. 2 plus 3
minus 4)
6
Adjustments for current year
additions (1/2 times (col. 3 minues 4)) If
negative, enter "0"
7
Base amount for capital cost
allow ance (col. 5 minus
6)
8
Rate %
9
CCA for the year (col. 7 times
8 or an adjusted amount)
10
UCC at the end of the year
(col. 5 minus 9)
20XX 20X1 20X2
Capital Cost Allowance A - 37
Capital Gains and CCACapital Gains and CCA
• If you sell a depreciable asset for more than it’s If you sell a depreciable asset for more than it’s original cost…then the difference is a realized original cost…then the difference is a realized capital gain:capital gain:
Capital Gain = Selling Price – Original CostCapital Gain = Selling Price – Original Cost
$3,500 = $20,000 - $16,500$3,500 = $20,000 - $16,500
• You would use the lower of the Original cost or You would use the lower of the Original cost or the selling price when recording the asset the selling price when recording the asset disposal for CCA purposes…. (in this case disposal for CCA purposes…. (in this case $16,500)$16,500)
Capital Cost Allowance A - 38
Finding Ending UCCFinding Ending UCC
• You can always do a detailed table to finding ending You can always do a detailed table to finding ending UCC given the assumption of maximum use of available UCC given the assumption of maximum use of available CCA in each year…CCA in each year…
• However, you can also use a formula:However, you can also use a formula:
50.329,62$
)6561)(.95(.000,100$
)9)(.95(.000,100$
)1.1)(2
1.1(000,100$
)1)(2
1(
5
5
45
155
10
UCC
UCC
UCC
UCC
rr
CUCC nn
Capital Cost Allowance A - 39
Finding ending CCA using a full CCA Finding ending CCA using a full CCA ScheduleSchedule
1 Class
number
2 Undepreciated
capital cost (UCC) at the start of the
year
3 Cost of additions in
the year
4 Proceeds of
dispositions in the year (Use the low er of Original cost
or selling price)
5 UCC
after additions and
dispositions (col. 2 plus 3
minus 4)
6 Adjustments for
current year additions (1/2 times (col. 3 minues 4)) If
negative, enter "0"
7 Base amount for capital cost
allow ance (col. 5 minus 6)
8 Rate %
9 CCA for the year
(col. 7 times 8 or an adjusted
amount)
10 UCC at the end
of the year (col. 5 minus 9)
6 0.00 100,000.00 0.00 100,000.00 50,000.00 50,000.00 0.1 5,000.00 95,000.00 95,000.00 0.00 0.00 95,000.00 0.00 95,000.00 0.1 9,500.00 85,500.00
85,500.00 0.00 0.00 85,500.00 0.00 85,500.00 0.1 8,550.00 76,950.0076,950.00 0.00 0.00 76,950.00 0.00 76,950.00 0.1 7,695.00 69,255.0069,255.00 0.00 0.00 69,255.00 0.00 69,255.00 0.1 6,925.50 62,329.50
Capital Cost Allowance A - 40
CCA and Capital BudgetingCCA and Capital Budgeting
• Since the tax shield on CCA varies over time and Since the tax shield on CCA varies over time and the stream of tax shield benefits can go on the stream of tax shield benefits can go on forever, it is necessary to develop an equation for forever, it is necessary to develop an equation for the tax shield on CCAthe tax shield on CCA
• This equation assumes the asset is purchased and This equation assumes the asset is purchased and held forever (there is no salvage value)…that the held forever (there is no salvage value)…that the maximum CCA is claimed each yearmaximum CCA is claimed each year
k
k
dk
Td
1
5.1C
:CCAon SavingsTax of ValuePresent
0
Capital Cost Allowance A - 41
Summary and ConclusionsSummary and Conclusions
In this chapter you have developed:In this chapter you have developed:– A thorough understanding of the capital cost allowance A thorough understanding of the capital cost allowance
system used by CRA system used by CRA – An understanding of the differences between accounting An understanding of the differences between accounting
depreciation and CCAdepreciation and CCA– An understanding of the financial statement impacts of An understanding of the financial statement impacts of
CCA versus accounting depreciationCCA versus accounting depreciation– An understanding of the cash flow implications of CCAAn understanding of the cash flow implications of CCA– How to calculate the tax shield benefits of CCA and the How to calculate the tax shield benefits of CCA and the
sum of the present value of tax shield benefits.sum of the present value of tax shield benefits.– How various disposition assumptions can be incorporated How various disposition assumptions can be incorporated
into a tax shield estimate.into a tax shield estimate.
Capital Cost Allowance A - 42
Internet LinksInternet Links
• Canada Revenue Agency – Canada Revenue Agency – CCA Classes• Canada Revenue Agency – Canada Revenue Agency – CCA Depreciable Property Described• Canada Revenue Agency – Canada Revenue Agency – Tax Forms• Canada Revenue Agency – Canada Revenue Agency – CCA Form 2006 and later years• About Capital Cost Allowance (Small Business Canada)(Small Business Canada)
Capital Cost Allowance A - 43
CopyrightCopyright
Copyright © 2007 John Wiley & Copyright © 2007 John Wiley & Sons Canada, Ltd. All rights Sons Canada, Ltd. All rights reserved. Reproduction or reserved. Reproduction or translation of this work beyond that translation of this work beyond that permitted by Access Copyright (the permitted by Access Copyright (the Canadian copyright licensing Canadian copyright licensing agency) is unlawful. Requests for agency) is unlawful. Requests for further information should be further information should be addressed to the Permissions addressed to the Permissions Department, John Wiley & Sons Department, John Wiley & Sons Canada, Ltd.Canada, Ltd. The purchaser may The purchaser may make back-up copies for his or her make back-up copies for his or her own use only and not for distribution own use only and not for distribution or resale.or resale. The author and the The author and the publisher assume no responsibility publisher assume no responsibility for errors, omissions, or damages for errors, omissions, or damages caused by the use of these files or caused by the use of these files or programs or from the use of the programs or from the use of the information contained herein.information contained herein.