Bonus Slide Set - Capital Cost Allowance

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


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.


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)


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.


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.


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


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!!


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


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.


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.


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


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


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!


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



• 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



• 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.


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 - 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


CCA Schedule (simple)CCA Schedule (simple)

1 Class

number

2 Undepreciated


year

3 Cost of


4 Proceeds of

dispositions in the year (Use the low er of Original cost

or selling price)

5 UCC

after additions and


minus 4)

6 Adjustments for


negative, enter "0"

7 Base amount

for capital cost allow ance

(col. 5 minus 6)

8 Rate %

9 CCA





6 10,000.00 0.00 0.00 10,000.00 0.00 10,000.00 0.1 1,000.00 9,000.00


CCA Schedule (simple over time)CCA Schedule (simple over time)

1 Class

number

2 Undepreciated


year

3 Cost of


4 Proceeds of


or selling price)

5 UCC

after additions and


minus 4)

6 Adjustments for


negative, enter "0"

7 Base amount

for capital cost allow ance

(col. 5 minus 6)

8 Rate %

9 CCA





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


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


6)

8

Rate %

9

CCA for the year (col. 7 times


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.


CCA Schedule (simple – ½ net additions CCA Schedule (simple – ½ net additions rule)rule)

Year

1

Class number

2


year

3


the year

4


or selling price)

5



minus 4)

6



negative, enter "0"

7



6)

8

Rate %

9



10


(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.


CCA Schedule (simple – changes over CCA Schedule (simple – changes over time)time)

Year

1

Class number

2


year

3


the year

4


or selling price)

5



minus 4)

6



negative, enter "0"

7



6)

8

Rate %

9



10


(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


CCA Schedule (simple – changes over CCA Schedule (simple – changes over time)time)

Year

1

Class number

2


year

3


the year

4


or selling price)

5



minus 4)

6



negative, enter "0"

7



6)

8

Rate %

9



10


(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.


CCA Schedule (Disposals)CCA Schedule (Disposals)

Year

1

Class number

2


year

3


the year

4


or selling price)

5



minus 4)

6



negative, enter "0"

7



6)

8

Rate %

9



10


(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.


CCA Schedule – changes over timeCCA Schedule – changes over time

Year

1

Class number

2


year

3


the year

4


or selling price)

5



minus 4)

6



negative, enter "0"

7



6)

8

Rate %

9



10


(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


CCA Schedule – RecaptureCCA Schedule – Recapture

Year

1

Class number

2


year

3


the year

4


or selling price)

5



minus 4)

6



negative, enter "0"

7



6)

8

Rate %

9



10


(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.


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.


CCA Schedule – Terminal LossCCA Schedule – Terminal Loss

Year

1

Class number

2


year

3


the year

4


or selling price)

5



minus 4)

6



negative, enter "0"

7



6)

8

Rate %

9



10


(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’.


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.


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)


CCA Schedule – Capital GainCCA Schedule – Capital Gain

Year

1

Class number

2


year

3


the year

4


or selling price)

5



minus 4)

6



negative, enter "0"

7



6)

8

Rate %

9



10


(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.


CCA Schedule – Capital Gain and a CCA Schedule – Capital Gain and a RecaptureRecapture

Year

1

Class number

2


year

3


the year

4


or selling price)

5



minus 4)

6



negative, enter "0"

7



6)

8

Rate %

9



10


(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.


CCA Schedule templateCCA Schedule template

Year

1

Class number

2


year

3


the year

4


or selling price)

5



minus 4)

6



negative, enter "0"

7



6)

8

Rate %

9



10


(col. 5 minus 9)

20XX 20X1 20X2


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)


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


Finding ending CCA using a full CCA Finding ending CCA using a full CCA ScheduleSchedule

1 Class

number

2 Undepreciated


year

3 Cost of additions in

the year

4 Proceeds of


or selling price)

5 UCC

after additions and


minus 4)

6 Adjustments for


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


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


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.


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)


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Bonus Slide Set - Capital Cost Allowance

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