On July 1, 2019, the Flex Company's warehouse was completely destroyed in a fire. The capital cost of the warehouse was $1,500,000 and its January 1, 2019 UCC was $1,248,539. On December 1, 2019, the company received insurance proceeds of $1,650,000, an amount equal to the estimated fair market value of the building. On April 1, 2020, the Company acquires an existing warehouse building for $1,800,000. Provided the Company makes all possible elections to reduce Tax Payable, what amount will be added to the Class 1 UCC as the result of this acquisition?

Question

Quizplus · Accepted Answer

When a capital asset is destroyed, a terminal loss occurs in the year of the loss equal to the undepreciated capital cost (UCC) of the property. In this case, the terminal loss is $1,248,539.

When the insurance proceeds are received, the company must first deduct any costs incurred in collecting the insurance proceeds. Assuming there are no such costs in this case, the company will receive a $1,650,000 receipt on disposition of the destroyed warehouse, which is equal to the fair market value of the building.

Since the receipt ($1,650,000) is greater than the capital loss ($1,248,539), the company will realize a capital gain of $401,461. This amount will be included in income in the year the insurance proceeds are received (2019).

When the company acquires the new warehouse building for $1,800,000, it will add the full amount to Class 1 UCC, since the WDA rate for this class is 4%. Therefore, the amount added to the Class 1 UCC will be $1,800,000 x 4% = $72,000.

To summarize, the company will have a terminal loss of $1,248,539 in 2019, a capital gain of $401,461 in 2019, and will add $72,000 to the Class 1 UCC in 2020. The total amount added to the UCC as a result of the acquisition is therefore $1,248,539 - $401,461 + $72,000 = $919,078.

However, the question asks what amount will be added to the UCC after making all possible elections to reduce Tax Payable. One such election is the capital cost allowance (CCA) reserve. The company can claim a reserve of up to 90% of the amount of the UCC that would otherwise be added to the Class 1 UCC in the year of the acquisition. Therefore, the maximum reserve that could be claimed in this case is 90% x $72,000 = $64,800.

The amount that will be added to the Class 1 UCC after making this election is $72,000 - $64,800 = $7,200.

Therefore, the correct answer is (C) $1,398,539.

On July 1, 2019, the Flex Company's Warehouse Was Completely