Depreciable Property and Eligible Capital Property Chapter 5 Depreciable Property and Eligible Capital Property

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

CCA System Types of capital property Other considerations Non-depreciable capital property Depreciable Property Eligible Capital Property Other considerations CCA and neutrality CCA and tax planning

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.

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

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 (b) Proceeds of disposition (xxx) UCC before adjustment Deduct: ½ net amount UCC before CCA Deduct: CCA for the year Add: ½ net amount UCC at the end of the year

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 calculation Purchases during the year $ xxx Deduct: less of capital cost and proceeds of disposition (xxx) Net amount (positive only) $ xxx

Common Property not Affected by the Half-Year Rule Basic Rules of CCA Exhibit 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

Recapture on disposition: Basic Rules of CCA Recapture on disposition: Capital Cost $10,000 Proceeds on disposition 8,000 UCC 7,000 Previously claimed as CCA Recapture of CCA claimed Recapture will be an inclusion in income reflecting a disposition in excess of UCC, which resulted in a negative UCC balance.

Terminal loss on disposition: Basic Rules of CCA Terminal loss on disposition: Previously claimed as CCA Capital Cost $10,000 UCC 7,000 Proceeds of Disposition 5,000 Terminal loss Terminal loss reflects additional decline in value over $3,000 of CCA previously claimed. A terminal loss is deducted from net income if no assets remain in the class. If assets remain in the class, continue to claim CCA on UCC balance.

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

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

Automobiles used in employment or business Used in Business Used for Employment Class 10 Automobiles For 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

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).

Electronic Office Equipment 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

Exceptions to Declining Balance Method Leasehold improvements CCA is least of: 1/5 of the capital cost of the leasehold interest; and 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).

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?

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

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

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”.

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.

Involuntary and 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.

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

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

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%

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.

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

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