To: Accounting Associate From: Tax Manager Subject: Silvia Fields Our client, Silvia Fields, is the self-employed...

To: Accounting Associate

From: Tax Manager

Subject: Silvia Fields

Our client, Silvia Fields, is the self-employed operator of a VIP delivery service. Three years ago, Silvia purchased her only asset, a van, for a cost of $24,000. The van has been used 100% for business deliveries since it was purchased. The UCC balance in Class 10 at the beginning of this year is $14,280. On March 1, Silvia sold the van for $10,300 and leased a new van for $400 a month.

REQUIRED: Please draft the contents of a letter to Sylvia explaining the income tax implications of the disposition of the van.

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Expert Solution

To : Tax Manager

From: Accounting Associate

Subject: Silvia Fields

The income tax implications of the disposition of the van has been as follow:

Cost of Van is $24,000

UCC Balance of class 10 at the beginning is $14,280

Van has been disposed of for $10,300.

So, UCC of the class 10 at the end of the year = $14,280 - $10,300 = $3,980.

The balance is positive and no other asset remains in the class 10, hence $3,980 is being treated as a terminal loss.

Note:

When you sell a depreciable property for less than its original capital cost, but for more than the undepreciated capital cost (UCC) in its class, you do not have a capital gain.

Generally, the UCC of a class is the total capital cost of all the properties of the class minus the CCA you claimed in previous years. If you sell depreciable property in a year, you also have to subtract from the UCC one of the following amounts, whichever is less:

the proceeds of disposition of the property minus the related outlays and expenses
the capital cost of the property

If the UCC of a class has a negative balance at the end of the year, this amount is considered to be a recapture of CCA. Include this recapture in your income for the year of sale.

If the UCC of a class has a positive balance at the end of the year, and you do not have any properties left in that class, this amount is a terminal loss. Unlike a capital loss, you can deduct the full amount of the terminal loss from your income in that year.

If the balance for the UCC of a class is zero at the end of the year, then you do not have a recapture of CCA or a terminal loss.

ekkarill92 answered 1 year ago

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