Vous êtes sur la page 1sur 20

Solutions to Chapter 5 Assignment Problems

89

CHAPTER 5

Depreciable Capital Property and Eligible Capital


Property
Problem 1
[ITA: 13(1), (2); 20(1)(a), (16.1); ITR: 1100(1), (2.5); 1101(5p); 1103(2h); 7307(1)(b); Sched. II, III]
On March 1, 2004, Jennifer Lobo began operating as a sole proprietorship and purchased the licence to
manufacture the computer software version of the latest trivia game, Tax is a Microcosm of Life on CD.
During the remainder of 2004, she acquired the following assets:
Manufacturing equipment............................................. $ 20,000
Tools (each costing under $200)...................................
16,000
Dies and moulds............................................................
8,000
Computer equipment and systems software..................
12,000
Photocopier...................................................................
6,000
Office furnishings..........................................................
15,000
Customer lists (expected to be used indefinitely)..........
4,000
Delivery van..................................................................
30,000
T.V. commercial video tape...........................................
22,000
Chairs and tables (for the employee eating area)..........
2,500
Cutlery and dishes (for the employee eating area)........
2,000
Table linens (for the employee eating area)...................
1,200
Automobile (for use by sales personnel visiting
clients)...................................................................
38,000
Licence to manufacture, based on patented
information, Tax is a Microcosm of Life on
CD for 3 years ending February 28, 2007...........
30,000
Made improvements on the building that she leased
on March 1, 2004; the lease was for 3 years
with two successive options to renew of 3 years
and 4 years............................................................
9,000
During 2005, she made the following additional purchases and disposals:
Bought a brick building and land in order to
$ 200,000
accommodate the expansion of her building; an
appraisal indicated that the building represented
45% of the total cost of the property...................
Sold the photocopier...................................................
(4,000)
Sold the automobile....................................................
(23,000)
Sold the T.V. commercial video tape..........................
(18,000)
Sold some of the tools (costing less than $200 each).
(5,000)
REQUIRED
Prepare a schedule to show the maximum capital cost allowance for the fiscal years ended December 31,
2004 and December 31, 2005, ignoring GST and PST considerations. Where choices are available, state the
reasons for your decision. Ignore the effects, if any, of the leap year.

Introduction to Federal Income Taxation in Canada

90
Solution 1
Cl. 1:
4%
$
Mar. 1, 2004 Purchases:
Manufacturing
equipment...............
Tools.........................
Dies and moulds.......
Computer equipment/software1........
Photocopier...............
Office furnishings.....
Delivery van.............
T.V. commercial
video tape...............
Chairs and tables.......
Cutlery and dishes.....
Table linens...............
Automobile 3..............
Licence to
manufacture4..........
Leasehold
improvements6........
Dec. 31, 2004 U.C.C.
before adjustment......
1
/2 net-amount5..........
U.C.C. before C.C.A.
C.C.A. prorated 306/365
days........................
1
/2 net-amount...........
Jan. 1, 2005 U.C.C.........
Purchases:
Brick building7.......
Office furniture.......
Disposals:
Photocopier............
Automobile 8...........
Office furnishings...
T.V. commercial
video tape............
Small tools.............
Dec. 31, 2005 U.C.C.
before adjustment......
1
/2 net-amount...........
U.C.C. before C.C.A.
C.C.A........................
Recapture..................
Terminal loss.............
1
/2 net-amount...........
Jan. 1, 2006 U.C.C.........

Cl. 8:
20%
$

Cl. 8:
20%
$

Cl. 10:
30%
$

Cl. 10:
30%
$

Cl. 10.1:
30%
$

Cl. 12:
100%
$

Cl. 13:
S.L.
$

Cl. 14:
S.L.
$

Cl. 43:
30%
$
20,000

16,000
8,000
12,000
6,000
15,000
30,000
22,000
2,500
2,000
1,200
30,000
30,000
9,000
6,000
(3,000)
3,000

17,500
(8,750)
8,750

12,000
(6,000)
6,000

30,000
(15,000)
15,000

30,000
(15,000)
15,000

49,200
(15,000)
34,200

9,000

30,000

9,000

30,000

(503)
3,000
5,497

(1,467)
8,750
16,033

(1,509)
6,000
10,491

(3,773)
15,000
26,227

(3,773)
15,000
26,227

(28,672)
15,000
20,528

(629)

(8,384)

8,371

21,616

20,000
(10,000)
10,000
(2,515)
10,000
17,485

90,000
(4,000)
(23,000)
(18,000)
(5,000)
90,000
(45,000)
45,000
(1,800)

1,497

16,033

10,491

26,227

(3,277)

(-2,472)

8,371

21,616

17,485

1,497

16,033
(3,207)

10,491
(3,147)

26,227
(7,868)

Nil
(3,934)

(2,472)

8,371
(1,500)

21,616
(10,000)

17,485
(5,245)

6,871

11,616

2,472
(1,497)
45,000
88,200

Nil

12,826

7,344

18,359

Nil

Nil

12,239

NOTES TO SOLUTION
(1) She should elect [Reg. 1101(5p)] to include the photocopier in a separate Class 8 from the office
furnishings and then to include the computer equipment and systems software in a separate Class 10 from the
truck. If the computer equipment has not been disposed of by December 31, 2008 (i.e., 4 years from the end of
the 2004 taxation year of acquisition), the U.C.C. of the computer equipment will be transferred into the main
Class 10.
(2) The customer lists purchased for $4,000, which are expected to be usable indefinitely, are eligible capital
property.
(3) The maximum cost for Class 10.1 is $30,000 (for 2004) plus GST and PST [Reg. 7307(1)(b)]. PST
would be included in the cost. GST would be refundable. There is no recapture or terminal loss on the disposition
of a Class 10.1 vehicle [ssecs. 13(2) and 20(16.1)].
(4) The $30,000 licence to manufacture, based on patented information, Tax is a Microcosm of Life on
CD expiring February 28, 2007 can be treated as:
(a) a Class 44 asset with C.C.A. claimed on a declining-balance basis at the rate of 25%, or
(b) a Class 14 asset with C.C.A. claimed on a straight-line basis over the remaining 1,095-day (3 years) life
of the licence, since Regulation 1103(2h) allows a taxpayer to elect that the property not be included in
Class 44.

Solutions to Chapter 5 Assignment Problems

91

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 C.C.A. for 2004 is $30,000 306/1095 days = $8,384. Class 14
C.C.A. for 2005 is $30,000 365/1095 = $10,000.
(5) Some Class 12 items, such as the tools, cutlery and linen in this case, are not affected by the half netamount rule.
(6) Lesser of: (a) 1/5 capital cost ($9,000) =$1,800
(b)

capital cost
$9,000

$1,500
remaining lease term plus first renewal option
33

The C.C.A. for 2004 is $1,500 1/2 306/365 = $629.


The C.C.A. for 2005 is $1,500.
(7) Since the building represents 45% of the total cost of the $200,000, the cost of the building is $90,000.
(8) $22,730 .30 1/2 C.C.A. = $3,410 in year of disposition [Reg. 1100(2.5)].

92

Introduction to Federal Income Taxation in Canada

Problem 2
(If consideration of the topics of involuntary and voluntary dispositions has been deferred to Chapter 8, this
problem should also be deferred.)
[ITA: 13(4)]
Elaine Barblaik owns an apartment building which she holds for rental income. In November 2004 , Elaine
settled with municipal authorities on expropriation proceeds for the property including the building. The agreed
expropriation proceeds for the building and the separate sale proceeds for the appliances and fixtures are
indicated in the following data:
Sold
Expropriated
appliances
building Cl.3
& fixtures
Cost.............................................. $ 406,000
$ 26,000
U.C.C. January 1, 2004................
188,500
7,250
Proceeds.......................................
362,500
2,600
Since negotiations had been prolonged, Elaine was able to anticipate the approximate date of settlement and,
as a result, she was able to replace in 2005 the assets expropriated.
Replacement cost for the building and the cost of new appliances and fixtures were as follows:
Building.............................. $ 1,276,000
Appliances and fixtures......
46,400
REQUIRED
Trace the effects of these events on the undepreciated capital cost for both assets through to the opening
balance on January 1, 2006 assuming no further additions are made to either class of assets.

Solutions to Chapter 5 Assignment Problems

93

Solution 2
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%
U.C.C. at January 1, 2004.................................................................................................... $ 188,500
2004 Disposal1
lesser of: (a) capital cost............................................. $ 406,000
(b) proceeds................................................. $ 362,500
(362,500)
U.C.C. at December 31, 2004.............................................................................................. $ (174,000)

2005
2004

Recapture.............................................................................................................................
U.C.C. at January 1, 2005....................................................................................................
File an amended return for 2004 [ssec. 13(4)] as follows:
U.C.C. at January 1, 2004....................................................................................................
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
(b) replacement cost
$ 1,276,000

174,000
Nil
$

188,500

(174,000)
(188,500)

U.C.C. December 31, 2004..................................................................................................

Nil
Building2
Class 1: 4%

2005

2004

Add:

capital cost of new building................................................................ $ 1,276,000


reduced as above [par. 13(4)(c)]......................................................... (174,000)
U.C.C. December 31, 2005..................................................................................................
C.C.A. claimed for 2005 @ 4% of [$1,102,000 1/2 $1,102,000)]...................................
U.C.C. January 1, 2006........................................................................................................

$ 1,102,000
$ 1,102,000
(22,040)
$ 1,079,960

U.C.C. January 1, 2004........................................................................................................


Less: disposal (proceeds not in excess of cost)....................................................................

Appliances &
fixtures3
Class 8: 20%
$
7,250
2,600

U.C.C. December 31, 2004..................................................................................................


Terminal loss........................................................................................................................
2005

U.C.C. January 1, 2005........................................................................................................


Add: capital cost of new appliances and fixtures.................................................................
U.C.C. December 31, 2005..................................................................................................
C.C.A. claimed for 2005 @ 20% of [$46,400 (1/2 $46,400)].........................................
U.C.C. January 1, 2006........................................................................................................

$
$

4,650
(4,650)
Nil
46,400
46,400
(4,640)
$ 41,760

NOTES TO SOLUTION
(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, 2005 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.
(3) Even if the equipment had been considered part of the involuntary disposition there would not have been
any recapture to defer.

94

Introduction to Federal Income Taxation in Canada

Problem 3
[ITA: 13(7)]
On January 20, 2004, a personal residence which originally cost $280,000 was converted into a rental
property. At this time the property had a fair market value of $320,000. On June 1, 2006, the property was
converted back to a personal residence. At that time the property had a fair market value of $305,000.
REQUIRED
If the building is the only asset in Class 1, which has a 4% capital cost allowance rate, how much capital
cost allowance may be deducted for the years 2004 through 2006, inclusive?

Solutions to Chapter 5 Assignment Problems

95

Solution 3
2004

2005
2006

Acquisition of depreciable capital property on January 20, 2004:


Lesser of [par. 13(7)(b)]:
(i) F.M.V. of the property at January 20, 2004.......................................................................
(ii) the total of:
(A) original cost at the time of change in use............................................... $ 280,000
(B) F.M.V. of the property at January 20, 2004....................... $ 320,000
Less the original cost at the time of change in use...........
280,000
Excess, if any................................................................... $ 40,000
1
/2 of the above excess, if any...............................................................
20,000
Lesser amount = U.C.C. at January 20, 2004.........................................................................
C.C.A. claimed (1/2 $300,000 .04)...................................................................................

$ 320,000

$ 300,000
$ 300,000
(6,000)

U.C.C. at January 1, 2005......................................................................................................


C.C.A. claimed ($294,000 .04)...........................................................................................

$ 294,000
$ (11,760)

U.C.C. at January 1, 2006......................................................................................................


Disposition of undepreciated capital property on June 1, 2006:
Lesser of:
F.M.V. of the property at June 1, 2006 [par. 13(7)(a)]............................ $ 305,000
capital cost.............................................................................................. $ 300,000
lesser amount....................................................................................................................
Recapture included in income................................................................................................

$282,240

(300,000)
$ (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.
(2) The impact of the change-in-use rules on the calculation of a capital gain or loss is as follows:
January 20, 2004 disposition:
Proceeds of disposition........................................................................................................... $ 320,000
Adjusted cost base..................................................................................................................
(280,000)
Capital gain............................................................................................................................ $ 40,000
June 1, 2006 disposition:
Proceeds of disposition........................................................................................................... $ 305,000
Adjusted cost base (January 20, 2004 proceeds)....................................................................
(320,000)
Decline in value (not deductible)........................................................................................... $ 15,000
Adjusted cost base subsequent to the change in use............................................................... $ 305,000

96

Introduction to Federal Income Taxation in Canada

Problem 4
[ITA: 14; 20(1)(b)]
Sharp is a musician who paid $500 in 1995 for an indefinite-life licence to perform in the subway walkway
areas. In 2000, Sharp decided to try a different approach to developing a following. He purchased the name of a
popular local band that stopped performing earlier that year. The cost of the name was $16,128 and the
appropriate amount was included in the January 1, 2001 balance below. In 2001, he purchased an indefinite-life
licence from the city for $5,000 which allowed him to perform on a street-corner on Saturday afternoons. In
2002, Sharp found that he wanted to spend more time in the studio, so he sold the street-corner licence for
$6,000. In 2005, Sharp decided to break up his band and pursue a career as an accountant. He sold the band name
for $20,000.
Sharp has not yet filed his tax return for 2005. The year-end of the business is December 31. The following
information is available with respect to the cumulative eligible capital account:
(a) the balance in the cumulative eligible capital account on January 1, 2001, was $11,492, and
(b) the total cumulative eligible capital amount claimed prior to 2001 was $979.
REQUIRED
Prepare a schedule calculating the balance of the cumulative eligible capital account on January 1, 2006, and
calculating the impact on income for 2005.

Solutions to Chapter 5 Assignment Problems

97

Solution 4
January 1,

2001
2001
December 31, 2001

............................................................................................................................
Purchase of licence (3/4 $5,000)........................................................................
C.E.C. balance.....................................................................................................
C.E.C.A. @ 7%...................................................................................................
January 1,
2002 C.E.C. balance.....................................................................................................
2002 Sale of licence (3/4 $6,000)...............................................................................
December 31, 2002 C.E.C. balance.....................................................................................................
C.E.C.A. @ 7%...................................................................................................
January 1,
2003 C.E.C. balance.....................................................................................................
2003 No transactions....................................................................................................
December 31, 2003 C.E.C. balance.....................................................................................................
C.E.C.A. @ 7%...................................................................................................
December 31, 2004 C.E.C. balance.....................................................................................................
C.E.C.A. @ 7%...................................................................................................
January 1,
2005 C.E.C. balance.....................................................................................................
2005 Sale of band name (3/4 $20,000).......................................................................
December 31, 2005 C.E.C. balance.....................................................................................................
Business income1....................................................................................................................
6,125
1,093
Non-taxable balance 1/3 of gain [1/3 ($7,218 3,939)].....................................................

C.E.C. a/c
$ 11,492
3,750
$ 15,242
(1,067)
$ 14,175
(4,500)
$ 9,675
(677)
$ 8,998

$ 8,998
(630)
$ 8,368
(586)
$ 7,782
(15,000)
$ (7,218)
7,218

January 1, 2006 C.E.C. balance..............................................................................................

Nil

Business income for 2005 is the total of:


a) the lesser of:
i) $7,218 and
ii) $979 + 1,067 + 677 + 630 + 586 = $3,939............................................................
plus
b) 2/3 ($7,218 3,939)....................................................................................................
2

Proceeds ($6,000 + $20,000)..............................................................................................


Cost ($500 + $16,128 + $5,000)...........................................................................................
Gain......................................................................................................................................
1
/2..........................................................................................................................................

3,939
2,185
6,125
$ 26,000
(21,628)
$ 4,372
$ 2,186

(2)

98

Introduction to Federal Income Taxation in Canada

Problem 5
[ITA: 14; 20(1)(b), (cc); IT-206R]
Con-Glo Corporation has been involved in various food services businesses since its incorporation in 1991.
Con-Glo has a December 31 year-end. You have been asked by the controller to examine the transactions
involving various intangible assets due to an impending sale of the business. The controller wants to ensure that
he understands the implications on the sale. You have been provided with the following information.
Shortly after the business was incorporated, Con-Glo purchased its first family restaurant. The purchase
price included $43,000 for goodwill. After operating this business for a number of years and ensuring that it was
profitable, another restaurant was purchased in 1998. The purchase again included goodwill in the amount of
$68,000. The second restaurant had more of a roadhouse atmosphere. The business had obtained a liquor licence.
The value of the licence at the time of the purchase was $21,133, and this amount was allocated to the licence in
the purchase agreement.
Con-Glo operated the two restaurants until 2000 when it purchased a fast food franchise. The franchise was
for an undefined number of years and cost $103,000.
The fast food restaurant, while successful, was too much of a drain on the time of the owners of Con-Glo
and was sold in 2002. The value of the franchise agreement was determined to be $110,000.
In 2003, it was determined that the original family restaurant would be more successful if it obtained a
liquor licence. In order to obtain the licence a presentation had to be made to the liquor licensing board. Con-Glo
paid $29,000 in legal fees related to the presentation to the board.
In 2004, the second restaurant was sold. Con-Glo received $80,000 for the goodwill and $60,000 for the
liquor licence.
Due to health problems of the owners wife, Con-Glo is also considering a sale of the balance of their
restaurants in 2005. The selling price will include $250,000 for goodwill.
REQUIRED
Prepare a schedule calculating the balance of the cumulative eligible capital account as of January 1, 2006,
and determine the impact of the above transactions on income for 1998 through 2005. Assume that the opening
balance on January 1, 1998, was $20,865, the 1992 to 1997 CECA deductions were a total of $11,385, and that
the company took the maximum tax write-offs that it was entitled to in each of the years 1998 to 2003. (Hint:
consider paragraph 20(1)(cc).) Assume also that Con-Glo was deemed to be in the same business in respect of its
restaurant and catering business as per IT-206R.

Solutions to Chapter 5 Assignment Problems

99

Solution 5
C.E.C. balance at January 1, 1998
Purchase of goodwill (3/4 $68,000).......................................................................................
Purchase of liquor licence of second restaurant (3/4 $21,133)...............................................

$ 20,865
51,000
15,850

Subtotal
C.E.C.A. balance @ 7%...........................................................................................................
C.E.C. balance at January 1, 1999...........................................................................................
C.E.C.A. balance @ 7%...........................................................................................................
C.E.C. balance at January 1, 2000...........................................................................................
Purchase of franchise (3/4 $103,000).....................................................................................

$ 87,715
(6,140)
$ 81,575
(5,710)
$ 75,865
77,250

Subtotal
C.E.C.A. balance @ 7%...........................................................................................................
C.E.C. balance at January 1, 2001...........................................................................................
C.E.C.A. balance @ 7%...........................................................................................................
C.E.C. balance at January 1, 2002...........................................................................................
Disposal of franchise (3/4 $110,000).....................................................................................

$ 153,115
(10,718)
$ 142,397
(9,968)
$ 132,429
(82,500)

Subtotal
C.E.C.A. balance @ 7%...........................................................................................................
C.E.C. balance at January 1, 2003...........................................................................................
C.E.C.A. balance @ 7%...........................................................................................................
C.E.C. balance at January 1, 2004...........................................................................................
Disposals: Goodwill (3/4 $80,000).........................................................................................
Liquor licence (3/4 $60,000)..................................................................................................

$ 49,929
(3,495)
$ 46,434
(3,250)
$ 43,184
(60,000)
(45,000)

Subtotal
Business income inclusion1......................................................................................................
Non-taxed 1/2 of gain [1/3 (i.e., 1/2 2/3) ($61,816 $50,666)]...........................................

($
61,816)
58,099
3,717

2005

C.E.C. balance at January 1, 2005...........................................................................................


Disposal of goodwill (3/4 $250,000)......................................................................................

$
Nil
(187,500)

2005

Subtotal
Business income inclusion2......................................................................................................
Non-taxed 1/2 of gain [1/3 (i.e., 1/2 2/3) ($187,500 $0)]..................................................

(187,500)
125,000
62,500

C.E.C. balance at January 1, 2006...........................................................................................

1998

1998
1999

2000
2001
2002
2002
2003
2004

2004

NOTES TO SOLUTION
(1) The business income in 2004 is calculated as:
The total of:
(a)
the lesser of:
(i) the negative amount..........................................................................
and
(ii) the total of:
all cumulative eligible capital deductions ........................................
less: all recaptured deductions in prior years ...................................

61,816

50,666
(0)
50,666

$
The lesser is..............................................................................................
and
(b)

/3 of negative amount less recaptured deductions above [2/3


($61,816 $50,666)]................................................................................

Nil

50,666

Business income.....................................................................................................

7,433*
$ 58,099

Introduction to Federal Income Taxation in Canada

100

(2) The business income in 2005 is calculated as:


The total of:
(a)
the lesser of:
(i) the negative amount..........................................................................
and
(ii) the total of:
all cumulative eligible capital deductions.........................................
less: all recaptured deductions in prior years....................................
The lesser is..............................................................................................
and
(b)

$ 187,500
$

50,666
(50,666)
$
Nil
$

Nil

/3 of negative amount less recaptured deductions above


125,000*
[2/3 ($187,500 $0)]..............................................................................
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 2003 with respect to the presentation to the liquor licencing board would be considered
costs of representation and, therefore, fully deductible [par. 20(1)(cc)].

Solutions to Chapter 5 Assignment Problems

101

Problem 6
[ITA: 13; 14; 20(1)(a), (b); ITR: 1100; Sched. II, II]
Jons Auto Parts Ltd., which manufactures small equipment, was incorporated in 1978 and had the following
balances in its records concerning its capital assets as at January 1, 2005.
Depreciation
C.C.A.
Type of asset
Straight-line Book value
Class
U.C.C.
Land.........................
Nil
$ 102,000
Nil
Building....................
40 years
272,000
3
$ 153,000
Equipment................
5 years
163,000
8
39,000
Rolling stock
trucks etc. (for
3 years
306,000
10
170,000
transportation of
goods).......................
Leasehold
improvements
(see note (1)
life of lease
113,000
13
165,000
below)..................
Licences....................
5 years
70,000
14
87,393
Additional Information
(1) The Class 13 assets consist of:
Improvements to a leased warehouse costing $100,000 in 2004. The remaining length of the lease
in 2004 was 6 years with two successive options of 4 years.
Improvements to a leased office space for head office downtown, costing $81,600 in 2003. The
remaining length of the lease was five years with an option to renew for an additional one year.
(2) The licences were purchased to start on April 22, 2003, at a cost of $110,500 and had a life of five
years.
(3) During 2005, the company had the following capital transactions:
Additions:
Purchased a new concrete building costing $1,625,000, including
$325,000 for land.
Additional expenditures re the building:
Paved parking lot for employees........................................... $ 97,000
Erected a steel fence around an outside storage area............
65,000
Further renovations to leased office space, costing...............
51,000
Purchased equipment:
Office equipment.................................................................. $ 47,000
Manufacturing equipment.....................................................
255,000
Radio communication equipment.........................................
60,000
Purchased a distributing licence on March 1, 2005, for 5 years from a
foreign manufacturing company of a related product line, cost: $240,000.
Paid $34,500 in legal fees in reorganizing the capital structure.
Disposals:
Cost
Equipment office..............................
Brick building in Cl. 3 (excluding land)

$ 16,250
390,000

Book
value
$
4,225
272,000

Proceeds
$

1,950
568,000

REQUIRED
Prepare a schedule for tax purposes to reflect the above transactions and calculate the maximum write-off
for tax purposes. (Ignore the effects of the replacement property rules in subsection 13(4) and the effects of leap
years.)

Introduction to Federal Income Taxation in Canada

102
Solution 6

Cl. 1:
4%
U.C.C., Jan. 1/05....................................
Additions:
Building..........................................
Steel fence......................................
Office equipment............................
Radio equipment............................
Disposals:
Office equipment............................
Building..........................................
U.C.C., Dec. 31/05 before adjustment...
1
/2 net-amount........................................
U.C.C. before C.C.A..............................
C.C.A. or recapture for 2005.................
1
/2 net-amount........................................
U.C.C. for Jan. 1/2006...........................

Cl. 3:
5%
$ 153,000

Cl. 6:
10%

Cl. 8:
20%
$ 39,000

Cl. 10:
30%
$ 170,000

$ 1,300,000
$

65,000
47,000
60,000
(1,950)

$ 1,300,000
(650,000)
$ 650,000
(26,000)
650,000
$ 1,274,000

U.C.C., Jan. 1/05..........................................................


Additions:
Parking lot............................................................
Leasehold improvement........................................
Manufacturing equipment.....................................
Licence.................................................................
U.C.C., Dec. 31/05 before adjustment.........................
1
/2 net-amount...............................................................
U.C.C. before C.C.A....................................................
C.C.A. for 2005............................................................
1
/2 net-amount...............................................................
U.C.C. for Jan. 1/2006.................................................

Opening balance....................................
3
/4 E.C.E. (legal fees)5.........................

C.E.C. a/c

$ 25,875

Balance..................................................
C.E.C.A. @ 7%.....................................
Balance..................................................

$ 25,875
(1,811)
$ 24,064

(390,000)1
$(237,000)

$(237,000)
237,0001

Nil
Cl. 13:
SL
$ 165,000

65,000
(32,500)
$
32,500
(3,250)
32,500
$
61,750

$ 144,050
(52,525)2
$ 91,525
(18,305)
52,5252
$ 125,745

Cl. 14:
SL
$ 87,393

Cl. 17:
8%

170,000
(Nil)
$ 170,000
(51,000)
Nil
$ 119,000
Cl. 43:
30%

$ 97,000
51,000
$
$ 216,000

$ 216,000
(28,700)3

$ 187,300

240,000
$ 327,393 $ 97,000
N/A
(48,500)
$ 327,393 $ 48,500
(62,341)
(3,880)
N/A
48,500
$ 265,052 $ 93,120

255,000

255,000
(127,500)
$ 127,500
(38,250)
127,500
$ 216,750

NOTES TO SOLUTION
(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) 1/2
(3) 2003: lesser of (a)

$81,600
$16,320
5

.......................................................................$13,600

(b)

$81,600
$13,600
5 1
2004: lesser of (a)

$100,000
$20,000
5

.......................................................................$10,000

Solutions to Chapter 5 Assignment Problems


(b)

$100,000
$10,000
64

103

Introduction to Federal Income Taxation in Canada

104
2005: lesser of (a)

$51,000
$10,2000
5

1/2 in first year.......................................

$5,100

Total C.C.A..............................................................................................................................

$ 28,700

$110,500
365 days ...............................................................
(4) Licences...................
5 365 * *

$ 22,100

$240,000
306 * * * ...................................................................
5 365

40,241

Total................................................................................................................................................

$ 62,341

(b)

$51,000
$12,700
3 1

Licence.....................

** Remaining days from April 22, 2003 (excluding leap year effects) of 5-year licences.
*** Class 14 is not affected by the half-net-amount rule [Reg. 1100(2)(a)].

(5) Legal fees pertaining to the capital structure of the firm would be treated like incorporation costs as
eligible capital expenditures.

Solutions to Chapter 5 Assignment Problems

105

Problem 7
[ITA: 13; 14; 1820; ITR: 1100; Sched. II, III]
The controller of Choleva Products Limited has provided you with the following draft income statement as
well as some notes that she made during the preparation of this statement.
Choleva Products Limited
STATEMENT OF INCOME
For the year ended December 31, 2005
Sales........................................................................................... $ 8,300,000
Cost of goods sold (Note (1))..................................................... (6,800,000)
Gross profit................................................................................. $ 1,500,000
Commission income...................................................................
70,000
$ 1,570,000
Administrative and marketing expenses (Note (2)) $ 500,000
Depreciation and amortization (Note (3))...............
80,000
Interest on long-term debt (Note (4))......................
70,000
Interest on bank indebtedness.................................
120,000
(770,000)
$ 800,000
Gain on disposal of property, plant and equipment (Note (3))
40,000
Net income before income taxes................................................. $ 840,000
Provision for income taxes..........................................................
(400,000)
Net income after income taxes.................................................... $ 440,000
Notes Prepared by Controller:
(1) The cost of goods sold expense includes the following amounts:
(a) A $9,000 loss from a theft by a warehouse employee;
(b) A $15,000 reserve for future decline in the value of inventory because of new products expected to be
introduced by the competitor. There was no such reserve in 2004.
(2) Administration and marketing expenses include:
(a) An $11,000 increase in the reserve for warranty expenses;
(b) $4,000 of donations to registered charities;
(c) $1,500 for golf club membership dues for the Vice-President of Sales and $2,000 for meals and
entertainment expenses at the golf club. The Vice-President of Sales uses the club to generate sales;
(d) $85,000 in accrued bonuses, including $62,000 paid to employees on May 31, 2006, and $23,000 paid
to employees on June 30, 2006;
(e) A $15,000 year-end party for all employees;
(f) $8,000 of financing fees incurred in connection with the mortgage of the corporations new plant,
including legal fees of $6,000 and an appraisal fee of $2,000;
(g) $5,000 of legal fees in connection with the purchase of shares of another company; and
(h) $300 for an upgrade of word-processing software.
(3) The fixed asset section of the controllers working papers indicate the following:
(a) The undepreciated capital cost balances at December 31, 2004 were as follows:
Class 3........................................ $ 200,000
Class 8........................................
60,000
Class 10......................................
80,000
Class 13......................................
37,500
CEC............................................
5,000
(b) Gain on disposal of property of plant and equipment consists of the profit on the sale of the
corporations only Class 3 asset (proceeds: $180,000; original cost in 1990: $300,000). The land on
which the building was situated was also sold for its fair market value which was equal to its cost in
1990.

106

Introduction to Federal Income Taxation in Canada

(c) During 2005 the corporation made the following purchases:

A new building was purchased for $700,000. The cost of the related land was $400,000. It cost
$20,000 to pave part of the land for use as a parking lot and $30,000 to erect fencing;

New office furniture was purchased for $25,000. This purchase replaced office furniture which was
sold for its $4,000 net book value (original cost: $10,000);

An unlimited life franchise was purchased for $100,000;

A 10-year licence to use patented information (expiring June 30, 2015) was purchased on July 1
for $20,000; and

Improvements on its leased head office premises which were rented in 2003 for 4 years with two
successive options to renew for 5 years and 5 years. Improvements had originally been made in
2003 in the amount of $45,000. Additional improvements were made in 2005 at a cost of $28,000.
(d) During the year, the corporation sold some small tools (each costing less than $200) for their net book
value of $500.
(4) Interest on long-term debt includes:
(a) Bond discount amortization in the amount of $2,000;
(b) $18,000 of interest on bonds issued to buy shares in another company; and
(c) $50,000 of interest on the mortgage on the new plant.
REQUIRED
Calculate the corporations minimum income from business or property for the year ended December 31,
2005, under the provisions of the Act. Assume all expenses are reasonable in the circumstances. Support your
treatment of each item listed above with a reason or a section reference. Ignore the effects of leap years.

Solutions to Chapter 5 Assignment Problems

107

Solution 7
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.
Reference
Net income after income taxes.................................................................................. $ 440,000 Sec. 9
Add:
Provision for income taxes................................................................................
400,000 Par. 18(1)(e)
Depreciation and amortization...........................................................................
80,000 Par. 18(1)(a)
Reserve for future decline in the value of inventory..........................................
15,000 Par. 18(1)(e)
Increase in the reserve for warranty expenses...................................................
11,000 Par. 18(1)(e)
Donations to registered charities........................................................................
4,000 Par. 18(1)(a)
Golf club membership dues for the Vice-President of Sales..............................
1,500 Par. 18(1)(1)
1,000 Sec. 67.1
Meals and entertainment at golf club (50% $2,000).......................................
Accrued bonus not paid until June 30, 2005......................................................
23,000 Ssec. 78(4)
6,400 Par. 20(1)(e)
Financing fees (4/5 $8,000)..............................................................................
Legal fees in connection with purchase of shares..............................................
5,000 Par. 18(1)(b)
Accounting software update for payroll tax information...................................
300 Par. 18(1)(b)
Class 12: Recapture ($300 (software) $500 (small tools))..............................
200 Ssec. 13(1)
Bond discount amortization...............................................................................
2,000 Par. 18(1)(f)
$ 989,400
Deduct:
Gain on disposal of property, plant and equipment............................................
(40,000) Par. 18(1)(b)
Capital cost allowance, etc.:
(14,000) Par. 20(1)(a)
Class 1 (4%): CCA = $700,000 1/2 4%........................................................
Class 3 (5%): terminal loss = $200,000 $180,000
(20,000) Ssec. 20(16)
(14,100) Par. 20(1)(a)
Class 8 (20%): CCA = 20% of ($60,000 + 1/2 ($25,000 $4,000))................
(24,000) Par. 20(1)(a)
Class 10 (30%): CCA = $80,000 30%............................................................
Class 13 (SL): (see Schedule 1).........................................................................
(7,000) Par. 20(1)(a)
(800) Par. 20(1)(a)
Class 17 (8%): CCA = $20,000 1/2 8%........................................................
(1,500) Par. 20(1)(a)
Class 6 (10%): CCA = $30,000 1/2 10%......................................................
Class 44 (25%): (see Schedule 2)......................................................................
(2,500) Par. 20(1)(a)
(5,600) Par. 20(1)(bb)
CEC: 7% of ($5,000 + 3/4 $100,000)..............................................................
$ 859,900
Alternate Tabular Calculation of CCA/CECA
UCC 1/1/05...
Purchases......
Disposals......
UCC 12/31/05
1
/2 N-A..........
UCC..............
Recapture......
CCA/CECA. .
Terminal loss.

Cl. 1
4%

$ 700,000

$ 700,000
(350,000)
$ 350,000

(14,000)

Cl. 3
5%
$ 200,000

(180,000)
$ 20,000

$ 20,000

(20,000)

Cl. 6
Cl. 8
Cl. 10
Cl. 12
10%
20%
30%
100%

$ 60,000 $ 80,000

$ 30,000
25,000

$
300

(4,000)

(500)
$ 30,000 $ 81,000 $ 80,000 $
(200)
(15,000)
(10,500)

$ 15,000 $ 70,500 $ 80,000 $


(200)

200
(1,500)
(14,100)
(24,000)

Cl. 13
SL
$ 37,500
28,000

$ 65,500

$ 65,500

(7,000)

Cl. 17
8%

$ 20,000

$ 20,000
(10,000)
$ 10,000

(800)

Cl. 44
25%

$ 20,000

$ 20,000
(10,000)
$ 10,000

(2,500)

CEC
7%
$
5,000
75,000 (3/4)

$ 80,000

$ 80,000

(5,600)

Introduction to Federal Income Taxation in Canada

108
Schedule 1: Class 13
2003 Improvements:
Lesser of: (a)

/5 capital cost:

$45,000
= $9,000
5

capital cost
$45,000

remaining lease term plus first renewal option


45

(b)

= $5,000

The lesser amount is $5,000.


2005 Improvements:
Lesser of: (a)
(b)

/5 capital cost:

$28,000
= $5,600
5

capital cost
$28,000

remaining lease term plus first renewal option


25

= $4,000

The lesser amount is $4,000.


The CCA for 2005 is $4,000 1/2 = $2,000
The total CCA for the 2003 and 2005 improvements is $5,000 + $2,000 = $7,000.
Schedule 2: Class 44
The $20,000 licence to use patented information which expires June 30, 2015 can be treated as a Class 44 or
Class 14 asset on an elective basis. The 2005 CCA in class 44 is $20,000 25% 1/2 = $2,500.
Class 44 treatment allows for a faster writeoff 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 2005 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 IT-185R, par. 2 and
Cassidys Limited v. M.N.R., (T.C.C.) 89 DTC 686.
$62,000 paid to employees on May 31, 2005 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).