In: Accounting
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.
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:
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.