During 2020, a depreciable capital asset with a capital cost of $100,000 and a January 1 UCC balance of $79,400, is sold for $103,000. In the accounting records, the asset had a net book value of $83,400. What are the tax consequences of this sale?

Question

Quizplus · Accepted Answer

The tax consequences of the sale of a depreciable capital asset are calculated using the Undepreciated Capital Cost (UCC) balance, which is the tax equivalent of the net book value.

The UCC balance at the beginning of the year was $79,400, and the capital cost of the asset was $100,000, so the Capital Cost Allowance (CCA) for the year would be 20% of $100,000, or $20,000.

The UCC balance at the end of the year would be $79,400 - $20,000 = $59,400.

Since the asset was sold for $103,000, there was a recapture of CCA, which is calculated as the difference between the selling price and the UCC balance.

Recapture of CCA = $103,000 - $59,400 = $43,600

Since the recapture amount is greater than the original cost of the asset, it is treated as business income, not capital gain. Therefore, the tax consequences of the sale are:

- Recapture of CCA: $43,600 (business income)
- Capital gain: $103,000 - $100,000 = $3,000 (capital gain)

Therefore, the correct answer is C.

During 2020, a Depreciable Capital Asset with a Capital Cost