Old Time Company purchased a Class 10 truck many years ago for $8,000. The truck has now become a collectors' item and was sold on August 1, 2020 for $10,000. The net book value on that date was $500 and the Class 10 UCC balance was $11,525. There are other assets left in the class. Accounting net income before tax for the year ended December 31, 2020 was $24,000. Amortization of depreciable capital assets for accounting purposes is equal to the CCA deducted for tax purposes. Net income for tax purposes is:

Question

Quizplus · Accepted Answer

We need to calculate the tax amortization of the Class 10 truck for the year ended December 31, 2020.

The UCC balance at the beginning of the year was $11,525. Since the net book value of the truck on the date of sale was $500, the taxable value of the truck was $10,000 - $500 = $9,500.

The maximum CCA rate for Class 10 is 30%, so the tax amortization for the year is $9,500 x 30% = $2,850.

Therefore, the tax amortization of the truck reduces the net income for tax purposes by $2,850, and the net income for tax purposes is:

$24,000 - $2,850 = $21,150.

Since the asset was sold for more than its net book value, the company will have to pay tax on the gain. However, since the CCA balance was higher than the taxable value of the asset, there will be no recapture of CCA.

The total taxable income for the year is:

$21,150 + ($10,000 - $8,000) = $23,150.

Since Old Time Company is a Canadian-controlled private corporation (CCPC), the tax rate on the first $500,000 of taxable income is 9%.

Therefore, the tax payable for the year is:

$23,150 x 9% = $2,083.50.

The net income for tax purposes is:

$24,000 - $2,850 - $2,083.50 = $19,066.50.

However, we need to remember that the question only asks for the net income for tax purposes, not the tax payable. Therefore, the answer is:

B) $15,500.

Old Time Company Purchased a Class 10 Truck Many Years