Five years ago, Ottawa Styling Institute bought a hair straightening machine for $200,000.Assume the machine is the only asset in its class.The company has just sold the machine for $235,000.The UCC of the asset class just before the sale is $85,000.The tax consequences of this sale are:
I.Capital gain
II.CCA recapture
III.CCA terminal loss

Question

Quizplus · Accepted Answer

The sale of the hair straightening machine results in a capital gain because the selling price ($235,000) is greater than the UCC ($85,000). The capital gain would be calculated as follows:

Proceeds of disposition: $235,000
Less: UCC: -$85,000
Less: Adjusted cost base (ACB): -$200,000
Capital gain: $(-50,000)

However, since the machine was subject to CCA (capital cost allowance), there is also CCA recapture. The amount of CCA recapture would be equal to the lesser of the amount of CCA claimed and the capital gain. In this case, assuming straight-line CCA has been claimed, the CCA recapture would be:

UCC: $85,000
Less: CCA claimed: -$40,000 (20% x $200,000)
CCA recapture: $45,000

Therefore, the tax consequences of this sale are a capital gain ($50,000) and CCA recapture ($45,000), which means that the correct answer is B.

Five Years Ago, Ottawa Styling Institute Bought a Hair Straightening