Question 1

The calculation of amortization expense under generally accepted accounting principles and the determination of CCA to be deducted for tax purposes can be viewed as somewhat similar procedures. However, there are some differences that arise in the application of these procedures. Describe the similarities and differences between the procedures used to calculate amortization expense for accounting records and those procedures used to establish the amount of CCA to be deducted in tax returns.

Accepted Answer

The basic similarity between amortization and CCA procedures is that both are directed towards allocating the cost of a depreciable asset to periods of time subsequent to the year in which the asset is acquired. Even here, however, we find a difference. Amortization procedures require that this allocation period be the useful life of the asset. In contrast, CCA procedures often use periods that are longer or shorter than the life of the asset. For example, CCA procedures allocate the cost of some Class 12 assets to one year, even though the assets last considerably longer. Alternatively, the period of write-off for assets subject to declining balance procedures have an unlimited write off period.
The objectives of amortization and CCA procedures are different in that amortization procedures attempt to match amortization expense with the related revenues in order to present fairly the results of operations of the enterprise. In contrast, CCA is usually calculated in such a fashion as to minimize Tax Payable.
As far as methods are concerned, CCA procedures are limited to the use of straight line or declining balance methods with the added complications required to apply the Accelerated Investment Incentive provisions and the short fiscal period rules. Which of these methods is to be used is specified for various types of assets in the Income Tax Regulations. In contrast, amortization calculations can use a much wider range of methods and, in addition, the accountant has discretion as to the choice of methods for particular types of assets.
A final difference is in the application of the methods chosen. The CCA rules determine the maximum amount that will be allowed as a deduction for each class. If an enterprise wishes to minimize a business loss by taking less or no CCA in a particular period, there is no prohibition against deducting less than the maximum CCA. In contrast, accounting amortization must determine the amount to be deducted on a consistent basis from year to year, without being influenced by the level of income being experienced by the enterprise.

Question 2

Patents are normally allocated to Class 44 where they are subject to declining balance CCA calculations at a 25 percent rate. However, a taxpayer can elect to allocate these assets to Class 14, where they are subject to straight-line CCA over their legal life. Under what circumstances would this election be desirable?

Accepted Answer

The election could be useful if the patent is acquired near the end of its legal life. For example, if only three years remained, the annual write off would be one-third of the cost, resulting in larger deductions than would be the case using Class 44's 25 percent declining balance rate.

Question 3

Describe the type of items that are included in CCA Class 14.1 and give two examples.

Accepted Answer

Class 14.1 was established to replace, as of January 1, 2017, a balance that was referred to as Cumulative Eligible Capital. In general terms, it contains:
• goodwill;
• balances that were in Cumulative Eligible Capital prior to January 1, 2017; and
• property that is acquired after December 31, 2016 that would have been eligible capital property under the old definitions (the Income Tax Act defines this item differently but this is, in effect, the meaning of the definition). This last item is largely intangible capital assets that have an unlimited life. Examples would include purchased customer lists, the cost of licenses with unlimited lives, expenses of incorporation over $3,000 and the cost of certain government rights.

Question 4

If the government wishes to increase or decrease the rate applicable to a particular type of asset, this can be accomplished using two different approaches. Describe these approaches, indicate which you think is preferable, and explain the reason for your preference.

Accepted Answer

The answer of If the government wishes to increase or...

Question 5

For accounting purposes, assets are generally recorded at their acquisition cost. This amount would include the basic invoice cost, delivery and installation costs, and other expenditures required to make the asset available for use by the enterprise. Indicate some of the reasons why the capital cost of an asset for tax purposes may differ from the asset cost that will be recorded for accounting purposes.

Accepted Answer

The answer of For accounting purposes, assets are generally recorded...

Question 6

If a taxpayer has decided, in a particular taxation year, to deduct less than the maximum available CCA, he will need to decide from which classes the amount that will be deducted should be taken. How will he make this decision? Explain your conclusion.

Accepted Answer

The answer of If a taxpayer has decided, in a...

Question 7

Capital cost allowance for each class can be calculated using the declining balance method or the straight line method, as long as it is the same method used to calculate amortization for the financial statements.

Accepted Answer

Capital cost allowance (CCA) is calculated using the declining balance method as specified by the Canada Revenue Agency (CRA), and it does not have to match the amortization method used for financial statement purposes, which can be straight-line or another method.

Question 8

When there is a disposition of a depreciable asset, there may be recapture of CCA. Another possibility is that a terminal loss may arise. Indicate the conditions that will result in (1)recapture of CCA, and (2)a terminal loss.

Accepted Answer

The answer of When there is a disposition of a...

Question 9

For 2019, Class 8 acquisitions will generally be eligible for the Accelerated Investment Incentive (AccII)provisions. Prior to 2019, they were subject to the half-year rules. What will be the effect of this change on the maximum CCA that can be deducted for 2019?

Accepted Answer

The answer of For 2019, Class 8 acquisitions will generally...

Question 10

Undepreciated capital cost is decreased by government assistance received to acquire assets and increased by acquisitions of depreciable assets.

Accepted Answer

Undepreciated capital cost (UCC) is reduced by government assistance received for asset acquisition such as grants and subsidies. UCC is also increased by the acquisition of new depreciable assets that are added to the pool. Therefore, the statement is true.

Question 11

When there is a disposition of a depreciable asset, there may be recapture of CCA. Another possibility is that a terminal loss may arise. How are these balances treated in the determination of Net Income For Tax Purposes and the UCC balance?

Accepted Answer

The answer of When there is a disposition of a...

Question 12

A corporation with a June 30 year end begins its operations on January 1 of the current year. It acquires $50,000 of Class 8 assets on March 1. The maximum CCA for its fiscal year ending June 30 of the current year is $15,000.

Accepted Answer

The maximum Capital Cost Allowance (CCA) for Class 8 assets in the first year is calculated at a half-year rate, meaning the corporation can claim only up to half of the applicable CCA rate for the assets acquired in the fiscal year. Class 8 assets typically have a CCA rate of 20%, so for $50,000, the maximum CCA for the fiscal year would be $5,000 (20% of $50,000, then halved for the half-year rule).

Question 13

Capital cost allowance is analogous to the accounting term amortization and allocates the cost of the capital asset to current and subsequent taxation years.

Accepted Answer

Capital cost allowance is similar to amortization in that it spreads out the cost of a capital asset over several years for tax purposes.

Question 14

When a depreciable asset is sold or retired, the procedures used for tax purposes are usually very different than those used for accounting purposes. Describe the differences between the procedures used for tax purposes and those that would be required under generally accepted accounting principles for dispositions of depreciable assets.

Accepted Answer

The answer of When a depreciable asset is sold or...

Question 15

When a taxpayer acquires a photocopier to be used in producing business income, he can either allocate its cost to his general Class 8 or, alternatively, elect to allocate it to a separate Class 8. What is the potential advantage of allocating the cost of a photocopier to a separate Class 8?

Accepted Answer

The answer of When a taxpayer acquires a photocopier to...

Question 16

When a depreciable asset is sold, there may be no immediate tax consequences related to the sale. Indicate the conditions that must be present for this situation to occur.

Accepted Answer

The answer of When a depreciable asset is sold, there...

Question 17

Briefly explain why it is important to take care in allocating assets to the appropriate CCA class.

Accepted Answer

The answer of Briefly explain why it is important to...

Question 18

Each passenger vehicles with a cost in excess of $30,000 must be allocated to a separate Class 10.1. Other passenger vehicles are allocated to a single Class 10. Briefly describe the differences between the rules applicable to Class 10.1, and those applicable to Class 10.

Accepted Answer

The answer of Each passenger vehicles with a cost in...

Question 19

Describe the tax treatment of purchased goodwill.

Accepted Answer

The answer of Describe the tax treatment of purchased goodwill....

Question 20

For CCA purposes, most assets are allocated to a Class that contains all of the assets of that Class. However, in some cases individual assets have to be allocated to a separate Class, resulting in multiple balances for that Class. What are some examples of this type of situation?

Accepted Answer

The answer of For CCA purposes, most assets are allocated...

Quiz 5: Capital Cost Allowance