Self Study Problem Five-Two: CCA Calculations

Mr. Marker has been the sole proprietor of Marker Enterprises since its establishment 10 years ago. This
business closed its books on December 31 and, on January 1, 2020, the following information on its
assets was contained in the records of the business.

Type of Assets Undepreciated Capital Cost Original Capital Cost CCA Rate
Building (Class 1) $115,000 $190,000 4%
Equipment (Class 8) 96,000 130,000 20%
Vehicles (Class 10) 6,700 30,000 30%
Equipment (Class 53*) 75,000 100,000 50%

*The manufacturing and processing equipment was acquired in 2019

Other Information:
1. During the year ending December 31, 2020, Mr. Marker’s business acquired additional Class 8
equipment at a total cost of $75,000, which was sold during the year for total proceeds of
$35,000.
2. During the year ending December 31, 2020, Mr. Marker acquired a used automobile to be used in
his business for a total cost of $8,000. Also during this year, Mr. Marker sold one of the trucks
that was used in his business for proceeds of $25,000. This truck, which had an original capital
cost of $20,000, had achieved a high value as the result of its extra features, which were no
longer available on later models.
3. As the result of a decision to lease its premises in future years, Mr. Market sold his building for
total proceeds of $260,000. Of the $260,000 received, $150,000 is for the land on which the
building is situated. The adjusted cost base of the land was equal to the $150,000 proceeds of
disposition.

Calculate the total effect of all of the preceding information on Mr. Marker’s Net Income For Tax Purposes
for the year ending December 31, 2020. Your answer should include the maximum CCA that can be
deducted by Mr. Marker for each class. In addition, claucate the January 1, 2021, UCC balance for each
class.

Class 1
Opening Balance $115,000
Additions Nil
Dispositions - Lesser Of:
● Cost = $190,000
● Proceeds of Dispositions = $110,000 (110,000)
Ending Balance With no Remaining Assets in Class $5,000
Terminal Loss (5,000)
January 1, 2021, UCC Balance Nil
Since the building sold is the last asset in the class, there is a terminal loss of $5,000, which is deducted in the
determination of business income. The proceeds of disposition for the building total $110,000 ($260,000 -
$150,000). As the adjusted cost base of the land is equal to the proceeds of disposition, there is not gain on the
disposition of the land.
Class 8
Opening Balance $96,000
Additions $52,000
Dispositions - Lesser Of:
● Cost = $75,000
● Proceeds of Disposition = $35,000 (35,000) 17,000
Accll Adjustment [(½)($17,000)] 8,500
CCA Base $121,500
CCA at 20% (24,300)
Accll Adjustment Reversal (8,500)
January 1, 2021, UCC Balance $88,700
Class 10
Opening Balance $6,700
Additions $8,000
Dispositions - Lesser Of:
● Cost - $20,000
● Proceeds = $25,000 (20,000) (12,000)
Accll Adjustment (Only if Net Additions Are Positive) N/A
Negative Ending Balance $(5,300)
Recaptured CCA (i.e., Recapture) 5,300
January 1, 2021, UCC Balance Nil
As the cost of the used car is less than $30,000, its cost is added to Class 10. With respect to the retirement, only the
capital cost of the truck sold is deducted from Class 10. The excess of the $25,000 proceeds over the capital capital
cost of $20,000 is a $5,000 capital gain, one-half of which would be taxable. The $12,000 net deduction creates a
negative balance in the class and, as a consequence, no CCA will be taken for 2020. However, the negative balance
of $5,300 will have to be taken into income as recapture.
Class 53
Opening Balance $75,000
CCA at 50% (37,500)
January 1, 2021, UCC Balance $37,500
Summary of Results (Required)
Terminal Loss - Class 1 $(5,000)
CCA - Class 8 (24,300)
Recapture - Class 10 5,300
CCA - Class 53 (37,500)
Decrease in Net Business Income $(61,500)
Taxable Capital Gain - Class 10 [(½)($25,000 - $20,000)] 2,500
Decrease in Net Income For Tax Purposes $(59,000)

Self Study Problem Five-Five: Purchase and Sale of Goodwill

Traxit is a Canadian public company with a taxation year that ends on December 31. It is the policy of
Traxit Ltd. to claim maximum CCA for all classes. On January 1, 2020, Traxit had no balance in its Class
14.1. What follows are two independent cases involving payments for goodwill and receipts for goodwill.
In each case assume that Traxit has no other transactions during 2020 or 2021 that involve Class 14.1.
● Case One: During 2020, Traxit acquires two businesses. With the first acquisition, a payment is
made for goodwill of $56,000. With the second, a payment of $124,000 is made for goodwill. Both
businesses are absorbed into the other operations of Traxit. During 2021, Traxit sells a portion of
its business and, as a consequence, receives a payment for goodwill of $97,000.
● Case Two: During 2020, Traxit acquires two businesses. With the first acquisition, a payment is
made for goodwill of $34,000. With the second, a payment of $47,000 is made for goodwill. Both
businesses are absorbed into the other operations of Traxit. During 2021, Traxit sells a portion of
its business and, as a consequence, receives a payment for goodwill of $85,000.

Determine the tax consequences for the years 2020 and 2021 in each of these two cases. Your answer
should include the January 1, 2022, UCC balance for Class 14.1.

Case One
For the year ending December 31, 2020, the maximum CCA,a s well as the UCC balance for January 1, 2021, for
Traxit’s Class 14.1 would be as calculated as follows:
January 1, 2020, Balance Nil
2020 Additions ($56,000 + $124,000) $180,000
Accll Adjustment [(50%)($180,000)] 90,000
CCA Base $270,000
 2020 CCA [(5%)($270,000)] (13,500)
Accll Adjustment Reversal (90,000)
January 1, 2021, UCC $166,500

The results for 2021 would be calculated as follows:

January 1, 2021, UCC $166,500
Disposition - Lesser Of:
● Capital Cost = $180,000
● Proceeds of Disposition = $97,000 (97,000)
CCA Base $69,500
2021 CCA [(5%)($69,500)] (3,475)
January 1, 2022, UCC $66,025

There would be no immediate tax consequences resulting from the sale of goodwill, other than a reduction in the
UCC. Note that the capital cost in the calculation is of the single goodwill property.

Case Two
For the year ending December 31, 2020, the maximum CCA, as well as the UCC balance for January 1, 2021, for
Traxit’s Class 14.1 would be as calculated as follows:
January 1, 2020, Balance Nil
2020 Additions ($34,000 + $47,000) $81,000
Accll Adjustment [(50%)($81,000)] 40,5000
CCA Base $121,500
2020 CCA [(5%)($121,500)] (6,075)
Accll Adjustment Reversal (40,500)
January 1, 2021, UCC $74,925

The results for 2021 would be calculated as follows:

January 1, 2021, UCC $74,925
Disposition - Lesser Of:
● Capital Cost = $81,000
● Proceeds of Disposition = $85,000 (81,000)
Negative Ending Balance $(6,075)
Recapture of CCA 6,075
January 1, 2022, UCC Nil
Proceeds of Disposition $85,000
Capital Cost (81,000)
Capital Gain $4,000
Inclusion Rate 1/2
Taxable Capital Gain $2,000

There would be an increase in Net INcome For Tax Purposes of $8,075 ($6,075 + $2,000).

Self Study Problem Five-Seven: CCA Calculations

The fiscal year of the Atlantic Manufacturing Company, a Canadian public company, ends on December
31. On January 1, 2020, the UCC balances for the various classes of assets owned by the company are
as follows:
Class 1 - Building (Note 1)
Class 8 - Office Furniture and Equipment
Class 10 - Vehicles
Class 13 - Leasehold Improvements
 Class 14.1
Class 53 - Manufacturing Equipment

Note 1 - the Class 1 building was acquired, used, in 2008.

During the year ending December 31, 2020, the following acquisitions of assets were made:
Class 8 - Office Furniture and Equipment
Class 10 - Vehicles (Note 2)
Class 12 - Tools (Note 3)
Class 13 - Leasehold Improvements
Class 50 - Computer Hardware

Note 2 - the acquired vehicle was a delivery truck.

Note 3 - none of the tools that were acquired during the year cost more than $500.

During this same period, the following dispositions occurred:

● Class 8 - Used office furniture and equipment was sold for cash proceeds in the amount of
$35,000. The original cost of these assets was $22,000.
● Class 10 - A delivery truck with an original cost of $23,000 was sold for $8,500
● Class 53 - Since the manufacturing operations will be done by subcontractors in the future, all of
the manufacturing equipment was sold for total proceeds of $188,000. Its original cost was
$752,000.

Other Information:
1. The company leases a building for $27,000 per year that houses a portion of its manufacturing
operations. The lease was negotiated on January 1, 2017, and has an original term of eight
years. There are two renewal options on the lease. The term for each of these options is four
years. The company made $78,000 of leasehold improvements immediately after signing the
lease. No further improvements were made until the current year.
2. On February 24, 2020, one of the company’s cars was totally destroyed in an accident. At the
time of the accident, the fair market value of the care was $12,300. The proceeds from the
company’s insurance policy amounted to only $8,000. The original cost of the car was $17,000.
3. During March 2020, the company granted a manufacturing licence for one of its products to a
company in southern Ontario. This license paid $87,000 for the right to manufacture this product
for an unlimited period of time.
4. It is the policy of the company to deduct maximum CCA in all years.

Calculate the maximum 2020 CCA that can be taken on each class of assets, the January 1, 2021, UCC
balance for each class, and any other 2020 income inclusion or deductions resulting from the information
provided in the problem.

Class 1 - Building
There were no additions or dispositions in this class. As a consequence, the maximum 2020 CCA would be $25,000
[(4%)($625,000)]. The January 1, 2021, UCC of Class 1 would be $600,000 ($625,000 - $25,000).

Class 8 - Office Furniture and Equipment

Opening UCC Balance $155,000
Additions $27,000
Dispositions
Dispositions - Lesser Of:
● Capital Cost = $22,000
● Proceeds of Disposition = $35,000 (22,000) 5,000
Accll Adjustment [(50%)($5,000)] 2,500
CCA Base $162,500
2020 CCA [(20%)($162,500)] (32,500)
Accll Adjustment Reversal (2,500)
January 1, 2021, UCC Balance $127,500

The sale of the furniture and equipment would result in a taxable capital gain that would be calculated as follows:
Proceeds of Dispositions $35,000
Capital Cost (22,000)
Capital Gain $13,000
Inclusion Rate 1/2
Taxable Capital Gain $6,500

Class 10 - Vehicles
OPening UCC Balance $118,000
Additions $33,000
Disposition of Truck - Lesser Of:
● Capital COst - $23,000
● Proceeds of Disposition = $8,500 (8,500)
Disposition of Car = Lesser Of:
● Capital Cost - $17,000
● Proceeds of Disposition = $8,000 (8,000) 16,500
Accll Adjustment [(50%)($16,500)] 8,250
CCA Base $142,750
2020 CCA [(30%)($142,750)] (42,825)
Accll Adjustment Reversal (8,250)
January 1, 2021, UCC Balance $91,675

Note that the amount received from the insurance company on the destroyed vehicle is treated as proceeds from a
disposition.

Class 12 - Tools
Tools that cost $500 or less are allocated to Class 12 where they are not subject to the half-year rule or the Accll
provisions. This means that they are eligible for a write-off rate of 100% in the year of acquisition. As a
consequence, the entire $34,000 can be deducted as CCA for 2020, leaving a nil January 1, 2021, UCC balance.

Class 13 - Leasehold Improvements

In general, leasehold improvements will be written off over the term of the lease on a straight-line basis .For purpose
of applying this calculation, the term of the lease would include the first renewal option, beginning in a period after
the improvements were made. In the case of the original improvements, the period to be used is 12 years. With
respect to the improvements during the current year, the write-off period will be 9 years. Also note that Class 13
assets are eligible for the Accll provisions on net additions. The required calculations are as follows:
Opening UCC Balance $61,750
Additions 45,000
CCA Base $106,750
CCA:
● 2017 Improvements ($78,000 / 12) $(6,500)
● 2020 Improvements Including Accll
Adjustment [($45,000 / 9)(150%)] (7,500) (14,000)
January 1, 2021, UCC Balance $92,750

Class 14.1 - Intangible Assets

Opening UCC Balance Nil
Disposition - Lesser Of:
● Capital Cost = Nil
 ● Proceeds of Disposition = $87,000 Nil
January 1, 2021, UCC Balance Nil

Proceeds of Disposition $87,000

Capital Cost Nil
Capital Gain $87,000
Inclusion Rate 1/2
Taxable Capital Gain $43,500

Class 50 - Computer Hardware

Opening UCC Balance Nil
Additions 28,000
Accll Adjustment [(50%)($28,000)] 14,000
CCA Base $42,000
2020 CCA [(55%)($42,000)] (23,100)
Accll Adjustment Reversal (14,000)
January 1, 2021, UCC Balance $4,900

Class 53 - Manufacturing Equipment

Opening UCC Balance $217,000
Dispositions - Lesser Of:
● Capital Cost - $752,000
● Proceeds of Disposition = $188,000 (188,000)
Ending Balance With No Remaining Assets in Class $29,000
Terminal Loss (29,000)
January 1, 2021, UCC Balance Nil

After all of the assets in Class 53 have been retired there is still a $29,000 UCC balance. This results in a terminal
loss that will be deducted in full from the Net Income of Atlantic Manufacturing Company.

Other Income Effects

In addition, the following income effects result from the information provided in the problem:
Taxable Capital Gain on Class 8 Assets $6,500
Taxable Capital Gain on Class 14.1 Assets 43,500
Terminal Loss on Class 53 Assets (29,000)
Total Inclusion $21,000

Summary of CCA and UCC Results (Note Required)

The maximum 2020 CCA and the January 1, 2021, UCC balances can be summarized as follows:

Maximum CCA UCC

Class 1 $25,000 $600,000
Class 8 32,500 127,500
Class 10 42,825 91,675
Class 12 34,000 Nil
Class 13 14,000 92,750
Class 14.1 Nil Nil
Class 50 23,100 4,900
Class 53 Nil Nil