Question

Spherical Manufacturing recently spent $ 16 million to purchase some equipment used in the manufacture of disk brakes. This equipment has a CCA rate of 30 % and Spherical's marginal corporate tax rate is 38 %.

a. What are the annual CCA deductions associated with this equipment for the first five years?

b. What are the annual CCA tax shields for the first five years?

Answer 1

Part (a)
Value of Equipment				16000000
CCA rate				30%
As per half year rule, depreciation of first year shall be allowed for half year, i.e. 15%. Depreciation for next and other years shall be 30% on reducing balance.
so, for first year depreciation = 16000000 * 30% * 1/2 =					2400000
For second year 30% on 13600000 (16000000-2400000) =					4080000
And so on other depreciation shall be provided.
Calculation of CCA deductions for first five years
Year	Opening Balance		CCA deduction for year			Closing Balance
			(opening balance * 30%)			(Opening balance - CCA deductions)
1	16000000	(@15%)	2400000			13600000
2	13600000	(@30%)	4080000			9520000
3	9520000	(@30%)	2856000			6664000
4	6664000	(@30%)	1999200			4664800
5	4664800	(@30%)	1399440			3265360
So, CCA deductions for first five years
1	$2,400,000
2	$4,080,000
3	$2,856,000
4	$1,999,200
5	$1,399,440
Part (b)
Tax rate =		38%
Value of Tax shield = CCA deduction * tax rate
Calculation of CCA Tax shield for first five years
Year	CCA deductions		Tax shield (CCA deduction * 38%)
1	$2,400,000		$912,000
2	$4,080,000		$1,550,400
3	$2,856,000		$1,085,280
4	$1,999,200		$759,696
5	$1,399,440		$531,787