Question

1. A proposed cost-saving device has an installed cost of $111,700. It is in Class 43 (30% rate) for CCA purposes. It will function for 6-years, at which time it will have no value.
   1. Calculate UCC at the end of 6-years.
   2. What are the tax implications when the asset is sold? Explain and state any assumptions you make.

Answer 1

CCA: CCA is the Capital Cost Allowance which is the deuction under the Canadian Revenue system as a percentage of the value of the depreciable assets over the life of the assets. It is not allowed for all the assets, but only to the specific assets at specific rates as deeduction.

UCC: UCC refers to undepreciated Capital cost is the remaing value of the asset which is not depreciated and allowed as deduction.

a) Calculation of UCC at the end of 6-years.

Given the Cost of the installed Device = $111,700.

Device belongs to Class 43, 30% rate

UCC = Net Cost of the Device - Net Cost of the Device * CCA Rate

Here Net Cost of the device includes UCC from prvious year, any additions or expenses made for the device. It is assumed no additions or expenses made.

UCC at the end of first year = $111,700 - ($111,700 * 30%) = $78,190

UCC at the end of Second year = $78,190 - ($78,190 * 30%) = $54,733

UCC at the end of third year = $54,733 - ($54,733 * 30%) = $38,313

UCC at the end of fourth year = $38,313 - ($38,313 * 30%) = $26,819

UCC at the end of fifth year = $26,819 - ($26,819 * 30%) = $18,773

UCC at the end of sixth year = $18,773 - ($18,773 * 30%) = $13,141

Hence UCC at the end of 6 years is $13,141

b) What are the tax implications when the asset is sold? Explain and state any assumptions you make.

The t(UCC) and axes on the disposal odf the asset will depend on the vale of the cost of the asset (ACB), Undepreciated Cpital Cost , amount received for the asset (POD)

suppose if the POD >UCC and ACB, there will be both capitlal gain and recaptured income , and it is taxable at the normal income tax rates for recaptured income and capital gains tax rate for capital gains.

POD> UCC, POD<ACB, then there will be only recaptured income which is taxable at icome tax rate.

If POD < UCC and ABC, there will be aterminal loss which can be deducted against the income unless there is no additional otherasset in the same class.

I assume that the device is sold for $20,000, then there will be recaptured income

Recaptued Income = POD - UCC

= $20,000 - $13,141

Recaptued Income = $6,859

Recaptured income of $6,859 is included in the income statement and is taxed as per the normal income tax rates.