Depreciable Property and Eligible Capital Property: Solutions To Chapter 5 Assignment Problems

Solutions to Chapter 5 Assignment Problems 111
CHAPTER 5
Depreciable Property and Eligible Capital Property
Type 1 Problems
Solution 1: Purchase and Sale of Assets

Schedule 8
Identify the Schedule 1 adjustments that will be necessary.
Add back:
 Amortization is added back
 Recapture is added back
 Book loss on the sale of any asset is added back
 TCG added back
Deduct:
 CCA is deducted
 Book gain on the sale of any asset is deducted
112 Introduction to Federal Income Taxation in Canada
During the year it had the following transactions:
1. It sold the building and moved into rented space. It received proceeds of $250,000 for the building which
had an original cost of $275,000 and a net book value of $180,000.
a. Add recapture of $25,000.
b. Deduct book gain of $70,000 ($250,000 - $180,000)
c. There must have been land sold as well so there is missing information.
d. Ask what would happen if there is another smaller building in this class at another location with an
original cost of $75,000? – Same recapture. Further recapture when remaining building is sold.
2. It sold a class 8 asset for $3,000 which had an original cost of $6,500 and a net book value of $3,600.
a. Credit $3,000 to the pool and continue to claim CCA.
b. Add back the book loss of $600.
3. It bought a class 10 asset for $6,000. It also sold a class 10 asset for $8,000 which had an original cost of
$7,000 and a net book value of $5,500.
a. $6,000 is added to the pool
b. $7,000 (LOCP) is deducted leaving a balance of $19,000 before CCA. The half-year rule does not
apply, since there was not a net addition to the class.
c. There is also a capital gain on the sale of $1,000 but the students haven’t taken that topic yet.
d. Deduct the book gain of $2,500.
4. It sold the class 10.1 asset for $15,000 which had an original cost of $45,000 and a net book value of
$35,000.
a. There is no recapture [13(2)] or terminal loss [20(16.1)] on class 10.1. CCA can be claimed on the
opening balance for the year at ½ of the normal 30% rate in the year of disposition [1100(2.5)].
b. Add back the book loss of $20,000.
Missing Information
 Amortization
 Details on the sale of land
Solution 2: Leasehold Improvements
Leasehold improvements – $250,000 – Class 13
CCA in year 1 = lesser of:

a. 1/5 of the capital cost of $250,000 = $50,000
b. $250,000/(5+5) = $25,000
First year CCA = 50% x $25,000 = $12,500

Second and subsequent year CCA 25,000
Ideal Lease Term
The ideal term would have been an initial term plus the renewal period totaling five, e.g., 1+4, 2+3, 3+2,
4+1.
Then the deduction would have been $25,000 in the first year and $50,000 in the remaining years. From a
time value of money this has value. If Acme wanted more security, they could have a term of 2+3+10,
giving them 15 years of comfort.
What is included?
New walls, electrical, plumbing or other structural changes to make the space accommodate them.
Solution 3: Luxury Automobile
Seaforth Consulting
No terminal loss [20(16)] or recapture [13(2)] in year of disposal of Class 10.1 asset.
Instead, calculate 50% of the normal CCA for the year [1100(2.5)] then close the class.
HST ITC on $30,000 not $50,000 –> 13% x $20,000 = $2,600 lost.
For accounting purposes there is a book loss of $2,000 ($25,000 - $27,000) on the disposal of the 2011 car which
should be added back on Seaforth’s Schedule 1.
T4 for Judy
2015 – Judy’s T4 will have standby charge on the value of the new car of $50,000 + HST = $56,500.
20,004/20,004 x $56,500 x 2% x 12 months = $13,560. [Could be reduced if she drives > 50% for
business]
Operating benefit – need personal kilometres to calculate
Note:
Students may get confused by the fact that the corporate year end is August 31 st but they are reporting the taxable
benefit for the 2015 calendar year.
Missing information – kilometres driven for business and personal use

Solution 4: Eligible Capital Property, CECA
Health Food Proprietorship – purchase and sale of goodwill
Results for 2015:
 Proceeds of $30,000
 Business income to report of $9,565
Solution 5: Short Fiscal Year
Half-Year Rule [1100(2)]
A) A proprietorship is simply a name for an individual carrying on business by him or herself. The
individual is the taxable entity. As a proprietor her fiscal year is the full calendar year regardless of when she
started in business, since she was in existence throughout the year. Therefore, the short fiscal year rule does
not apply.
CCA = $350,000 x 4% x ½ year rule = $7,000
This will be a Class 1 asset.
B) The incorporation took place on May 1 so, with a December 31 year end, it was only in existence for
245 days. As a result, it must prorate the CCA to reflect this short fiscal period.
CCA = $350,000 x 4% x ½ year rule x 245/365 = $4,699

Solution 6: Available For Use
Available for Use [13(26)]
Although the equipment was received in 2015, it was not “available for use” until 2016. As a result there is no
CCA available in 2014 for this machine.
In 2016, the machine would be added to Class 29 (50%) with the half year rule applying.
CCA = $500,000 x 50% x ½ = $125,000

Solution 7: Asset Disposition
Silvia’s decision to sell her van and replace it with a leased van has a number of income tax implications.
First, CCA class 10 is credited for the lower of cost or proceeds, or $10,300. The balance of $3,980 becomes a
terminal loss (subsection 20(16)) in the year of disposition.
UCC on van $
14,280
Disposition
Lesser of cost or proceeds
10,300
Terminal loss $
3,980
Second, the lease payments are deductible in the current year, assuming an operating lease.
Solution 8: CCA Schedule
Cl. 8:
Cl. 8: Cl. 10: Cl. 10.1: Cl. 12: Cl. 13: Cl. 14: Cl. 29: Cl. 50:
20%
20% 30% 30% 100% S.L. S.L. 50% 55%
(Sep.)
$ $ $ $ $ $ $ $ $
Post-Mar. 2014 Purchases:(1)
Manufacturing
equipment............... 20,000
Tools......................... 16,000
Dies and moulds....... 8,000
Computer equip-
ment/software(2)...... 12,000
Photocopier............... 6,000
Office furnishings..... 15,000
Delivery van............. 28,000
TV commercial video
tape......................... 22,000
Chairs and tables....... 2,500
Automobile (3)............ 30,000
Licence to
manufacture(4)......... 30,000
Leasehold
improvements(6)...... 9,000
Dec. 31, 2014 UCC before
adjustment................ 6,000 17,500 28,000 30,000 46,000 9,000 30,000 20,000 12,000
1
/2 net-amount(5)......... (3,000) (8,750) (14,000) (15,000) (15,000) (10,000) 6,000
UCC before CCA 3,000 8,750 14,000 15,000 31,000 9,000 30,000 10,000 6,000
CCA prorated 306/365
days........................ (503) (1,467) (3,521) (3,773) (25,989) (629) (8,384) (4,192) (2,767)
1
/2 net-amount........... 3,000 8,750 14,000 15,000 15,000 10,000 6,000
Jan. 1, 2015 UCC .......... 5,497 16,033 24,479 26,227 20,011 8,371 21,616 15,808 9,233
Disposals:
Photocopier............ (4,000)
Automobile (7).......... (23,000)
TV commercial video
tape...................... (18,000)
Small tools............. (5,000)
Dec. 31, 2015 UCC before
adjustment................ 1,497 16,033 24,479 (3,277) (2,989) 8,371 21,616 15,808 9,233
1
/2 net-amount...........
UCC before CCA...... 1,497 16,033 24,479 Nil (2,989) 8,371 21,616 15,808 9,233
CCA ......................... (3,207) (7,344) (3,934) (1,500) (10,000) (10,000) (5,078)
Recapture.................. 2,989
Terminal loss............. (1,497)
1
/2 net-amount...........
Jan. 1, 2016 UCC .......... Nil 12,826 17,135 Nil Nil 6,871 11,616 5,808 4,155
—NOTES TO SOLUTION
(1) The customer lists purchased for $4,000, which are expected to be usable indefinitely, are eligible capital
property.
(2) She should elect [Reg. 1101(5p)] to include the photocopier in a separate Class 8 from the office
furnishings.
(3) The maximum cost for Class 10.1 is $30,000 (for 2014) plus HST [Reg. 7307(1)(b)]. HST would be
refundable. There is no recapture or terminal loss on the disposition of a Class 10.1 vehicle [subsections 13(2)
and 20(16.1)].
(4) The $30,000 licence to manufacture, based on patented information, “Tax is a Microcosm of Life on
DVD” expiring February 28, 2017 can be treated as:
(a) a Class 44 asset with CCA claimed on a declining-balance basis at the rate of 25%, or
(b) a Class 14 asset with CCA claimed on a straight-line basis over the remaining 1,095-day (3-year) life of
the licence, since Regulation 1103(2h) allows a taxpayer to elect that the property not be included in
Class 44.
Because Class 14 treatment allows for a faster write-off of the cost of the licence, she should elect that the
property not be included in Class 44. Class 14 CCA for 2014 is $30,000  306/1095 days = $8,384. Class 14
CCA for 2015 is $30,000  365/1095 = $10,000.
(5) Some Class 12 items, such as the tools, in this case, are not affected by the half-year rule.
(6) Lesser of: (a) 1/5 capital cost ($9,000) = $1,800
capital cost $9,000
(b)  $1,500
remaining lease term plus first renewal option 33
The CCA for 2014 is $1,500  1/2  306/365 = $629.
The CCA for 2015 is $1,500.
(7) Cl. 10.1: $26,227  .30  1/2 CCA = $3,934 in year of disposition [Reg. 1100(2.5)].
Solution 9: CCA on Change of Use
2013 Acquisition of depreciable capital property on January 20, 2013:
Lesser of [par. 13(7)(b)]:
(i) FMV of the property at January 20, 2013................................................................................ $ 320,000
(ii) the total of:
(A) original cost at the time of change in use..................................................... $ 280,000
(B) FMV of the property at January 20, 2013.............................. $ 320,000
Less the original cost at the time of change in use................ 280,000
Excess, if any....................................................................... $ 40,000
½ of the above excess, if any..................................................................... 20,000 $ 300,000
Lesser amount = UCC at January 20, 2013................................................................................... $ 300,000
CCA claimed (½  $300,000  .04) [no short-year proration]...................................................... (6,000)
UCC at January 1, 2014................................................................................................................ $ 294,000
2014 CCA claimed ($294,000  .04)..................................................................................................... $ (11,760)
UCC at January 1, 2015................................................................................................................ $ 282,240
2015 Disposition of depreciable capital property on June 1, 2015:
Lesser of:
• FMV of the property at June 1, 2015 [par. 13(7)(a)].................................... $ 305,000
• capital cost................................................................................................... $ 300,000
lesser amount.......................................................................................................................... (300,000)
Recapture included in income....................................................................................................... $ (17,760)
Comments:
(1) The purpose of this problem is to illustrate the application of the change-in-use rules on the calculation
of capital cost allowance. It does not address the treatment of deductions for capital cost allowance in respect of
rental property, nor does it address the principal residence exemption.
(2) The impact of the change-in-use rules on the calculation of a capital gain or loss is as follows:
January 20, 2013 disposition:
Proceeds of disposition.................................................................................................................
$ 320,000
Adjusted cost base........................................................................................................................
(280,000)
Capital gain...................................................................................................................................
$ 40,000
June 1, 2015 disposition:
Proceeds of disposition.................................................................................................................
$ 305,000
Adjusted cost base (January 20, 2013 proceeds)...........................................................................
(320,000)
Decline in value (not deductible)..................................................................................................
$ 15,000
Adjusted cost base subsequent to the change in use......................................................................
$ 305,000
Solution 10: Eligible Capital Property Transactions
CEC a/c
January 1, 2011 ..................................................................................................................................
$ 11,492
2011 Purchase of licence (3/4  $5,000).............................................................................. 3,750
December 31, 2011 CEC balance............................................................................................................. $ 15,242
CECA @ 7%............................................................................................................. (1,067)
January 1, 2012 CEC balance............................................................................................................. $ 14,175
2012 Sale of licence (3/4  $6,000)..................................................................................... (4,500)
CECA @ 7%.............................................................................................................(677)
2013 No transactions......................................................................................................... —
CECA @ 7%.............................................................................................................(630)
CECA @ 7%.............................................................................................................(586)
2015 Sale of band name (3/4  $20,000)............................................................................. (15,000)
December 31, 2015 CEC balance............................................................................................................. $ (7,218)
Business income1..........................................................................................................................
6,125
Non-taxable balance 1/3 of “gain” [1/3  ($7,218 – 3,939)]............................................................. 1,093 7,218
January 1, 2016 CEC balance....................................................................................................... Nil
1
Business income for 2015 is the total of:
a) the lesser of:
i) $7,218 and
ii) $979 + 1,067 + 677 + 630 + 586 = $3,939.................................................................. 3,939
plus
b) 2/3  ($7,218 – 3,939).......................................................................................................... 2,186 2
6,125
2
Proceeds ($6,000 + $20,000)..................................................................................................... $ 26,000
Cost ($500 + $16,128 + $5,000).................................................................................................
(21,628
)
Gain............................................................................................................................................ $ 4,372
1
/2................................................................................................................................................ $ 2,186
Solution 11: Eligible Capital Property Transactions
CEC balance at January 1, 2008 $ 20,865
2008 Purchase of goodwill (3/4  $68,000).............................................................................................. 51,000
Purchase of liquor licence of second restaurant (3/4  $21,133)...................................................... 15,850
Subtotal $ 87,715
CECA balance @ 7%..................................................................................................................... (6,140)
CEC balance at January 1, 2009..................................................................................................... $ 81,575
2009 CECA balance @ 7%..................................................................................................................... (5,710)
Purchase of franchise (3/4  $103,000)............................................................................................ 77,250
Subtotal $ 153,115
2010 CECA balance @ 7%..................................................................................................................... (10,718)
20112 CECA balance @ 7%..................................................................................................................... (9,968)
2012 Disposal of franchise (3/4  $110,000)............................................................................................. (82,500)
Subtotal $ 49,929
CECA balance @ 7%..................................................................................................................... (3,495)
2013 CECA balance @ 7%..................................................................................................................... (3,250)
2014 Disposals: Goodwill (3/4  $80,000)................................................................................................ (60,000)
Liquor licence (3/4  $60,000)......................................................................................................... (45,000)
Subtotal ($ 61,816)
Business income inclusion(1)........................................................................................................... 58,099
Non-taxed 1/2 of “gain” [1/3 (i.e., 1/2  2/3)  ($61,816 – $50,666)]................................................... 3,717
CEC balance at January 1, 2015..................................................................................................... $ Nil
2015 Disposal of goodwill (3/4  $250,000)............................................................................................. (187,500)
Subtotal (187,500)
Business income inclusion(2)........................................................................................................... 125,000
Non-taxed 1/2 of “gain” [1/3 (i.e., 1/2  2/3)  ($187,500 – $0)].......................................................... 62,500
CEC balance at January 1, 2016..................................................................................................... $ Nil
(1) The business income in 2014 is calculated as:
The total of:
(a) the lesser of:
(i) the negative amount............................................................................... $ 61,816
and
(ii) the total of:
all cumulative eligible capital deductions ............................................. $ 50,666
less: all recaptured deductions in prior years ......................................... (0)
$ 50,666
The lesser is................................................................................................... 50,666
and
(b) /3 of negative amount less recaptured deductions above [2/3  ($61,816 –
2
$50,666)]....................................................................................................... 7,433*
Business income........................................................................................................... $ 58,099
(2) The business income in 2015 is calculated as:
The total of:
(a) the lesser of:
(i) the negative amount............................................................................... $ 187,500
and
(ii) the total of:
all cumulative eligible capital deductions.............................................. $ 50,666
less: all recaptured deductions in prior years.......................................... (50,666)
$ Nil
The lesser is................................................................................................... $ Nil
and
2
(b) /3 of negative amount less recaptured deductions above
[2/3  ($187,500 – $0)]................................................................................... 125,000*
Business income........................................................................................................... $ 125,000
This income number can be reconciled using the concept of a taxable capital gain as follows:
Proceeds ($110,000 + $80,000 + $60,000 + $250,000) $ 500,000
Cost ($43,000 + $68,000 + $21,133 + $103,000) (235,133)
Gain $ 264,867
1
/2 $ 132,434
Initial “gain” recognized $ 7,433
Second “gain” recognized 125,000
Total $ 132,433
The costs incurred in 2013 with respect to the presentation to the liquor licensing board would be considered
costs of representation and, therefore, fully deductible [par. 20(1)(cc)].
Solution 12: Five Independent Issues
(a) Janice has a terminal loss of $300 on selling her car, but she cannot claim this as subsection 20(16) does
not apply to employees.
(b) The building is a Class 1 asset and the CCA rate is 4%. Applying the half-year rule, Ramesh’s
maximum CCA is 4% of $37,500, or $1,500. As rent is property income and not business income, there is no
proration for number of days, because the taxation year for the owner who is an individual is the full calendar
year.
(c) As each building cost in excess of $50,000, each is a separate class. Consequently, William will have a
recapture on one but will be allowed CCA on the other:
Class 1 Bldg. 1 Bldg. 2
UCC $45,000 $45,000
Disposition — (60,000) (lesser of cost/proceeds)
CCA/Recapture (1,800) 15,000
UCC $43,200 NIL
(d) Land is not a depreciable property. Colin is not allowed any CCA.
(e) The building’s gross proceeds were $75,000 but Randi also paid legal fees of $2,000 on the sale of the
property. The legal fees should be allocated between the land and building based on the selling price ratio. The
building’s proceeds are $73,500 ($75,000 less $1,500 legal fees).
Solution 13: CCA Schedule
Cl. 1-MB: Cl. 1: Cl. 6: Cl. 8: Cl. 10:
10% 4% 10% 20% 30%
UCC, Jan. 1/15.......................................... $153,000 $ 39,000 $ 170,000
Additions:
Building............................................ $1,300,000
Steel fence......................................... $ 65,000
Office equipment.............................. 47,000
Radio equipment............................... 60,000
Disposals:
Office equipment.............................. (1,950)
Building............................................ (390,000)(1)
UCC, Dec. 31/15 before adjustment......... $1,300,000 $ (237,000) $ 65,000 $ 144,050 $ 170,000
½ net amount............................................ (650,000) — (32,500) (52,525)(2) (Nil)
UCC before CCA ..................................... $650,000 $(237,000) $ 32,500 $ 91,525 $ 170,000
CCA or recapture for 2015........................ (65,000) 237,000(1) (3,250) (18,305) (51,000)
½ net amount............................................ 650,000 — 32,500 52,525(2) Nil
UCC for Jan. 1/2016................................. $1,235,000 Nil $ 61,750 $ 125,745 $ 119,000
Cl. 13: Cl. 14: Cl. 17: Cl. 29:
SL SL 8% 50% SL
UCC, Jan. 1/15................................................................. $ 165,000 $ 87,393
Additions:
Parking lot................................................................ $97,000
Leasehold improvement........................................... 51,000
Manufacturing equipment......................................... $ 255,000
Licence..................................................................... 240,000
UCC, Dec. 31/15 before adjustment................................. $ 216,000 $ 327,393 $97,000 $ 255,000
½ net amount.................................................................... — N/A (48,500) (127,500)
UCC before CCA ............................................................ $ 216,000 $ 327,393 $48,500 $ 127,500
CCA for 2015................................................................... (28,700)(3) (62,341)(4) (3,880) (63,750)
½ net amount.................................................................... — N/A 48,500 127,500
UCC for Jan. 1/2016......................................................... $ 187,300 $ 265,052 $ 93,120 $ 191,250
CEC a/c
Opening balance....................................... —
3
/4  ECE (legal fees)(5).............................. $ 25,875
Balance..................................................... $ 25,875
CECA @ 7%............................................. (1,811)
Balance..................................................... $ 24,064
(1) Capital gain on building of $178,000 (i.e., $568,000 - $390,000); recapture of $237,000.
(2) ($47,000 + $60,000 – $1,950)  ½
(3) 2013: lesser of (a)
$81,600 ...........................................................................$13,600
$16,320
5
(b)
$81,600
$13,600
5 1
2014: lesser of (a)
$100,000 ...........................................................................$10,000
$20,000
5
(b)
$100,000
$10,000
64
2015: lesser of (a)
$51,000  ½ in first year........................................... $5,100
$10,200
5
(b)
$51,000
$12,750
3 1
Total CCA ...................................................................................................................................... $ 28,700
$110,500
(4) Licences..................... 365 days .................................................................. $ 22,100
 5 365 * *
$240,000
Licence...................... 306 * * * ...................................................................... 40,241
 5 365
Total....................................................................................................................................................... $ 62,341
** Remaining days from April 22, 2013 (excluding leap year effects) of five-year licences.
*** Class 14 is not affected by the half-net-amount rule [Regulation 1100(2)(a)].
(5) Legal fees pertaining to the capital structure of the firm would be treated like incorporation costs as
eligible capital expenditures.
Solution 14: Class 12 Assets and Half-Year Rule

The list of property acquired in the year that is not subject to the half-year rule is found in the Income Tax
Regulations, ITR 1100(2). Refer to ITR 1100(2)(a)(iii) and note the reference to “other than” followed by a
listing of the properties that are exempt from the half-year rule. Specifically it refers paragraphs (a) to (c), (e) to
(i), (k), (l), (p), (q), and (s) of Class 12.
Now, if you go to Regulation Schedule II, Class 12, you will note that cutlery is mentioned in paragraph ( b).
Thus, cutlery is exempt from the half-year rule. Word processing (application) software is mentioned in
paragraph (o). Paragraph (o), however, is not in the list of exceptions given in Reg. 1100(2)(iii). Hence, the half-
year rule applies to application software.
Solution 15: Replacement Property
An expropriation of rental property qualifies for subsection 13(4) treatment by virtue of paragraph (a).
Income from property of an individual must be reported on a calendar year basis.
Building Class
3: 5%
UCC at January 1, 2014.............................................................................................................. $ 188,500
2014 Disposal(1)
lesser of: (a) capital cost................................................ $ 406,000
(b) proceeds.................................................... $ 362,500 (362,500)
UCC at December 31, 2014........................................................................................................ $ (174,000)
Recapture.................................................................................................................................... 174,000
UCC at January 1, 2015.............................................................................................................. Nil
2015 File an amended return for 2014 [subsection 13(4)] as follows:
UCC at January 1, 2014.............................................................................................................. $ 188,500
2014 Deemed disposal [par. 13(4)(c)]
lesser of: (a) capital cost................................................ $ 406,000
(b) proceeds.................................................... $ 362,500 $ 362,500
reduced by lesser of:
(a) normal recapture
($362,500 – $188,500).................... $ 174,000
(174,000
)
(b) replacement cost $ 1,276,000 (188,500)
UCC December 31, 2014............................................................................................................ Nil
Building(2)
Class 1(Sep.):
4%
2015 Add: capital cost of new building..................................................................... $ 1,276,000
reduced as above [par. 13(4)(c)]............................................................... $ 1,102,000
(174,000
)
UCC December 31, 2015............................................................................................................ $ 1,102,000
CCA claimed for 2015 @ 4% of [$1,102,000 – 1/2  $1,102,000)]............................................. (22,040)
UCC January 1, 2016.................................................................................................................. $ 1,079,960
Appliances &
fixtures(3) Class
8: 20%
UCC January 1, 2014.................................................................................................................. $ 7,250
2014 Less: disposal (proceeds not in excess of cost)........................................................................... 2,600
UCC December 31, 2014............................................................................................................ $ 4,650
Terminal loss.............................................................................................................................. (4,650)
UCC January 1, 2015.................................................................................................................. Nil
2015 Add: capital cost of new appliances and fixtures........................................................................ $ 46,400
UCC December 31, 2015............................................................................................................ $ 46,400
CCA claimed for 2015 @ 20% of [$46,400 – (1/2  $46,400)].................................................... (4,640)
UCC January 1, 2016.................................................................................................................. $ 41,760
(1) IT-259R4, paragraph 3 appears to require that even if a replacement property is purchased in the
subsequent taxation year before the tax return is due for the year of disposition (i.e., before April 30, 2014 in this
case), the recapture must be reported for the year of disposition. Then an amended return can be filed to
implement subsection 13(4) when the replacement is purchased within the allowable time limit.
(2) Note how the rules [ssec. 13(4)] allow for a replacement with an asset of another class, i.e., a separate
class for a rental property costing more than $50,000, in this case.
(3) Even if the equipment had been considered part of the involuntary disposition there would not have been
any recapture to defer.
Type 2 Problems
Solution 16: Schedule 1 Reconciliation and CCA Schedule

Notes to Instructors:
(1) The “Required” does not (on purpose) ask for closing UCC balances (because most problems of these
type do not), so the solution does not do them in this case.
(2) Most of the CCA calculations have been put in the reconciliation rather than the notes to simulate the
calculations that students should do in this type of problem. The alternate tabular calculation is also presented.
ITA Reference
Net income after income taxes........................................................................................ $ 440,000 9
Add:
Provision for income taxes...................................................................................... 400,000 18(1)(e)
Amortization........................................................................................................... 80,000 18(1)(a)
Reserve for future decline in the value of inventory................................................ 15,000 18(1)(e)
Increase in the reserve for warranty expenses.......................................................... 11,000 18(1)(e)
Donations to registered charities.............................................................................. 4,000 18(1)(a)
Golf club membership dues for the Vice-President of Sales.................................... 1,500 18(1)(1)
Meals and entertainment at golf club (50%  $2,000)............................................. 1,000 67.1
Accrued bonus not paid until June 30, 2015............................................................ 23,000 78(4)
Financing fees (4/5  $8,000).................................................................................... 6,400 20(1)(e)
Legal fees in connection with purchase of shares.................................................... 5,000 18(1)(b)
Accounting software update for payroll tax information......................................... 300 18(1)(b)
Class 12: Recapture ($300 (software) – $500 (small tools)).................................... 200 13(1)
Bond discount amortization..................................................................................... 2,000 18(1)(f)
$ 989,400
Deduct:
Gain on disposal of property, plant and equipment.................................................. (40,000) 18(1)(b)
Capital cost allowance, etc.:
Class 1-NRB (6%): CCA = $700,000  1/2  6%..................................................... (21,000) 20(1)(a)
Class 1 (4%): terminal loss = $200,000 – $180,000 (20,000)* 20(16)
Class 8 (20%): CCA = 20% of ($60,000 + 1/2  ($25,000 – $4,000))....................... (14,100) 20(1)(a)
Class 10 (30%): CCA = $80,000  30%.................................................................. (24,000) 20(1)(a)
Class 13 (SL): (see Schedule 1)............................................................................... (7,000) 20(1)(a)
Class 17 (8%): CCA = $20,000  1/2  8%............................................................... (800) 20(1)(a)
Class 44 (25%): (see Schedule 2)............................................................................ (2,500) 20(1)(a)
CEC: 7% of ($5,000 + 3/4  $100,000).................................................................... (5,600) 20(1)(bb)
$ 854,400
Alternate Tabular Calculation of CCA/CECA
Cl. 1 Cl. 1- Cl. 8 Cl. 10 Cl. 12 Cl. 13 Cl. 17 Cl. 44 CEC
NRB
4% 6% 20% 30% 100% SL 8% 25% 7%
UCC 1/1/15... $ 200,000 — $ 60,000 $ 80,000 — $ 37,500 — — $ 5,000
Purchases...... — $ 700,000 25,000 — $ 300 28,000 $ 20,000 $ 20,000 75,000 (3/4)
Disposals...... (180,000) — (4,000) — (500) — — — —
UCC 12/31/15 $ 20,000 $ 700,000 $ 81,000 $ 80,000 $ (200) $ 65,500 $ 20,000 $ 20,000 $ 80,000
1
/2 N-A.......... — (350,000) (10,500) — — — (10,000) (10,000) —
UCC.............. $ 20,000 $ 350,000 $ 70,500 $ 80,000 $ (200) $ 65,500 $ 10,000 $ 10,000 $ 80,000
Recapture...... — — — — 200 — — — —
CCA/CECA. . — (21,000) (14,100) (24,000) — (7,000) (800) (2,500) (5,600)
Terminal loss. (20,000)* — — — — — — — —
* Note to instructors: Subsection 13(21.1) will not apply because there is no capital gain on the land.
Schedule 1: Class 13
2013 Improvements:
1
$45,000
Lesser of: (a) /5 capital cost: = $9,000
5
capital cost $45,000
(b)  = $5,000
The lesser amount is $5,000.
2015 Improvements:
1
$28,000
Lesser of: (a) /5 capital cost: = $5,600
5
capital cost $28,000
(b)  = $4,000
The lesser amount is $4,000.
The CCA for 2015 is $4,000  1/2 = $2,000
The total CCA for the 2013 and 2015 improvements is $5,000 + $2,000 = $7,000.
Schedule 2: Class 44
The $20,000 licence to use patented information which expires June 30, 2025 can be treated as a Class 44 or
Class 14 asset on an elective basis. The 2015 CCA in class 44 is $20,000  25%  1/2 = $2,500.
Class 44 treatment allows for a faster write-off and is automatic. Class 14 treatment, which is possible if a
taxpayer elects [Reg. 1103(2h)] not to have Class 44 apply, allows for CCA claim computed on a straight-line
basis over the 3,650-day life of the licences.
The 2015 Class 14 claim would only be $20,000  184/3,650 = $1,008. The Class 44 CCA is, therefore,
better.
Class 44 treatment is therefore recommended.
Items not Adjusted for in the Reconciliation:
— $9,000 loss from a theft by warehouse employee is deductible according to Income Tax folio S3-F9-C1
par. 1.35 and Cassidy’s Limited v. M.N.R., 89 DTC 686 (T.C.C.).
— $62,000 paid to employees on May 31, 2015 is paid before the 179-day deadline (1) in subsection 78(4)
and is deductible providing there is a legal obligation to pay it.
— A $15,000 year-end party for all employees is exempted from the 50% rule [par. 67.1(2)(e)].
— $18,000 of interest on bonds issued to buy shares in another company is deductible [par. 20(1)(c)].
— $50,000 of interest on the mortgage on the new plant is deductible [par. 20(1)(c)].
—NOTE TO SOLUTION
(1) IT-109R2 paragraph 10 permits payment to be made on the 180th day without invoking subsection 78(4).
Type 3 Problems
Solution 17: Insurance and Damage Receipts

Impact on taxable income for the current year:
Insurance receipts — business interruption $80,000
Moving costs (12,000)
Lease cancellation penalty (4,400)
Impact on taxable income $63,600
The compensation payments will impact taxes based on the timing of their receipt and the proprietorship’s
corresponding actions.
The personal injury damage award will not affect the proprietorship as it is income exempt under
paragraph 81(1)(g.1).
The inclusion of the recaptured depreciation from both the truck and the leasehold improvements would
normally be included in income. However, since this is an involuntary disposition of depreciable assets, the
recaptured depreciation will be included in the same pool as the replacement assets, providing the assets are
replaced before the end of the second taxation year following disposition.
Correspondingly, the only insurance receipt that should be included in income is that for business
interruption, as it represents income foregone because of the vandalism.
Please note that recapture is included in income in the current year. If the assets are replaced by the end of
the second year, the company will need to file an amended return to reverse the recapture inclusion in net income
from a business.
Class 10 13
UCC, beginning balance $ 15,000 $ 10,000
Proceeds (30,000) (15,000)
(15,000) (5,000)
Recapture — income 15,000 5,000
UCC, ending balance $ 0 $ 0
When a business changes locations it can incur several expenses as is the case here. The moving costs can
be deducted for tax purposes, as they represent a bona fide business expense. The lease cancellation penalty may
also be deducted from income for tax purposes under paragraph 20(1)(z). Normally, the deductible portion of a
lease cancellation penalty is prorated based on the remaining term of the lease. As mentioned above, leasehold
improvements will be included in class 13 capital assets and, therefore, may not be included in income. The
expense that was determined for business interruption cannot be deducted from income, as it does not represent a
real business expense but, rather, an estimate of foregone profits attributable to the inconvenience of the move.
This estimate could be viewed as an opportunity cost of moving.
Solution 18: Purchase and Sale of Assets
The main tax issues in this case relate to the acquisition of fixed assets, including goodwill.
1. Capital versus expense
 Are the repairs on the new equipment an expense or capital? [IT-174R]
 Would it make a difference if the repairs were carried out by employees of Dundas Holdings?
[IT-174R]
2. Available for use
 Would the equipment be available for use by the end of the taxation year in which it was acquired
and, thus, eligible for CCA?
3. CCA versus depreciation
 Printing presses are included in Class 8 — 20%
 For accounting purposes, the presses will be written off over their useful life, i.e., five years for the
used press they bought
 Subject to the half-year rule [Reg. 1100(2)]
4. Luxury automobiles
 Special rules apply for luxury automobiles costing over $30,000 [par. 13(7)(g)]
o Class 10.1—30%
o CCA limited to $30,000 on the new car
o Limitation on interest [sec. 67.2] and leasing cost [sec. 67.3]
 No recapture [ssec. 13(2)] or terminal loss [ssec. 20(16.1)], but one-half of normal CCA
[Reg. 1100(2.5)], since conditions met
 Standby charge taxable benefit on full cost of car including HST, not just the $30,000
5. Goodwill
 Deduction for goodwill as eligible capital property [sec. 14, par. 20(1)(b)]
Solution 19: Deductible Expenses and Employee Benefits
The main tax issues in this case are:
 expenses that might result in T2 Schedule 1 adjustments, and
 taxable benefits.
1. Golf club memberships
 Used extensively and successfully for business entertainment;
 however, they are non-deductible under paragraph 18(1)(l) even if they are used extensively to
earn income.
2. Entertainment expenses
 The entertainment expenses at the golf club are 50% deductible [sec. 67.1].
 The seasonal holiday party is not subject to that limitation since it is available to all employees
[ssec. 67.1(2)].
3. Land and Building
 Discuss whether the repairs made to the building should be capitalized or expensed.
4. Cars
 Limitation on the deductibility of the interest [sec. 67.2], lease costs [sec. 67.3], and CCA
[par. 13(7)(g)].
 Taxable benefits for the standby charge and related HST benefit and the operating benefit which
includes the HST benefit [ssecs. 6(1)(e), 6(1)(k), 6(2)].
5. Boat and cottage
 These entertainment expenses are deductible if they are incurred to earn income [par. 18(1)(a)] and
can be supported by receipts and records of who was entertained and when.
 The entertainment expenses are still subject to the 50% limitation [sec. 67.1]
6. Employees
 No taxable benefits for the group plans [par. 6(1)(a)] except for life insurance which is a taxable
benefit [ssec. 6(4)]
 Taxable benefit for company payment of the premium on the individual life insurance policies
where Andy or Sue are beneficiary
 Company payment of the premium on the individual disability policy for Andy and Sue will be a
taxable benefit, but any payments received under the plan will not be taxable to Andy and Sue
[IT-428, par 20]
 Deduction for all or part of the life insurance used as collateral for the bank [par. 20(1)(e.1)]
7. Donations
 Political donations are specifically disallowed [par. 18(1)(n)]
 Charitable donations are disallowed [par. 18(1)(a)] if they were not incurred to earn income.
o however, if some donations were made in order to gain future business then this
limitation may not apply [par.18(1)(a)]
8. Interest-free loan to employee
 there will be a deemed interest benefit [ssec. 80.4(1)] with an adjustment [ssec. 80.4(4)] for the
“housing loan” rules
 the interest expense incurred by the company to loan this money interest-free should be fully
deductible on the basis that it is part of funds borrowed to earn income from business [par. 18(1)
(a)].
o Administrative practice (and a proposed amendment) under paragraph 20(1)(c) would
allow the full deduction

Depreciable Property and Eligible Capital Property: Solutions To Chapter 5 Assignment Problems

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Solutions to Chapter 5 Assignment Problems 111

Solution 1: Purchase and Sale of Assets

Identify the Schedule 1 adjustments that will be necessary.

CCA in year 1 = lesser of:

First year CCA = 50% x $25,000 = $12,500

Ideal Lease Term

Operating benefit – need personal kilometres to calculate

Missing information – kilometres driven for business and personal use

Results for 2015:

CCA = $350,000 x 4% x ½ year rule = $7,000

This will be a Class 1 asset.

CCA = $350,000 x 4% x ½ year rule x 245/365 = $4,699

CCA = $500,000 x 50% x ½ = $125,000

Solution 14: Class 12 Assets and Half-Year Rule

Solution 16: Schedule 1 Reconciliation and CCA Schedule

Solution 17: Insurance and Damage Receipts

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