If the asset described in above Question had a CCA rate of 30%, with the usual half-year rule, and were leased for 5 years, how would the lessee treat the five years of CCA? The lessee tax rate is 40%.The asset class uses declining balance.
A)lessee would calculate the CCA amounts for each of the five years, apply the tax rate against these amounts, and show these amounts as cash outflows.
B)lessee would calculate the CCA amounts for the entire life of the asset, and show those amounts as cash flows.
C)lessee would ignore the CCA, since it is the lessor's financial province.
D)lessee would treat the CCA calculations for each of the five years of the lease as cash inflows for the lessor.

Question

Quizplus · Accepted Answer

The lessee would calculate the CCA amounts for each of the five years, apply the tax rate against these amounts, and show these amounts as cash outflows. This is because the lessee is responsible for the tax implications of leasing the asset and would need to account for the CCA in their tax calculations. The half-year rule would also need to be applied to the CCA calculation, as it is the usual practice in Canada. The fact that the asset class uses declining balance is not relevant to how the lessee would treat the CCA in their cash flows.

If the Asset Described in Above Question Had a CCA