TIF PROBLEM FIVE - 11

CCA Calculations

The following information relates to the Fortin Aluminum's depreciable assets.

TIF Problem Five - 11

CCA Calculations

Class 1 During 2018, a new office building was acquired at a total cost of $623,000. Of this total, it is estimated that the value of the land is $145,000. The building will be used 100 percent for non-residential activities, none of which involve manufacturing. It will be allocated to a separate Class 1.

Class 3 The January 1, 2018 balance in this Class was $798,000. During 2018, one of the warehouses in this Class burned to the ground. It had a capital cost of $150,000. Insurance proceeds totaled $185,000.

Class 8 The January 1, 2018 balance in this Class was $346,000. During 2018, the Company acquired Class 8 assets at a cost of $105,000. Class 8 assets with a capital cost of $83,000 were sold for proceeds of $75,000. None of the individual assets sold had proceeds that exceeded their individual capital cost.

Class 10 The January 1, 2018 balance in this Class was $150,000. During 2018, 3 passenger vehicles were acquired at a cost of $25,000 each. In addition, a delivery van with a capital cost of $42,000 was sold for $18,000.

Class 10.1 The January 1, 2018 balance in this Class was $17,850. The only asset in this Class was the CEO's $350,000 Bentley. At the instructions of the Company's direc- tors, who felt this vehicle was excessively extravagant, the car was sold for $275,000 during 2018.

Class 13 The January 1, 2018 balance in this Class was $42,500, reflecting improvements that were made in 2016, the year in which the lease commenced. These improvements were made on a property leased as office space for the Company's executives. The basic lease term is for 8 years, with an option to renew for a period of 2 years. Additional improvements, costing $40,000, were made during 2018.

Class 50 The January 1, 2018 balance in this Class was $23,000. During 2018, there were additions to this Class with a capital cost of $18,000.

Class 53 The January 1, 2018 balance in this Class was $63,000. The capital cost of the assets in this Class was $84,000. As the Company has found its manufacturing operations to be unprofitable, all of these assets were sold during 2018. The proceeds totaled $51,000. None of the individual assets sold had proceeds that exceeded their individual capital cost.

Fortin Aluminum always takes maximum CCA on each Class of depreciable assets.

Required: Calculate the maximum CCA that can be taken by Fortin Aluminum on each class of assets for the year ending December 31, 2018 and calculate the UCC for each class of assets on January 1, 2019. In addition, determine the amount of any capital gain, recapture, or terminal loss that arises. Ignore GST/HST/PST considerations.

Test Item File Problems for Canadian Tax Principles 2018 - 2019 160

TIF PROBLEM FIVE - 12

CCA And Tax Planning

On January 1, 2018, the Company has the following UCC balances:

Class 8 Class 10 Class 12 Class 13 Class14.1 (See Note)

$220,000 152,000 56,000 272,000 195,300

Note The company had a CEC balance on December 31, 2017 of $210,000. On January 1, 2018, this balance was transferred to the new class of 14.1.

During 2018, the cost of additions to Class 8 amount to $42,000, while the proceeds from dispositions in this class totaled $16,000. In no case did the proceeds of disposition exceed the capital cost of the assets retired, and there were still assets in the class as of December 31, 2018.

All of the Class 12 assets were acquired in 2017. The leasehold improvements were made in 2016 at a cost of $320,000. There were no 2018 acquisitions or dispositions in Classes 10, 12, 13 or 14.1. In previous years, the Company has always deducted the maximum amount of CCA.

Required:

1. Calculate the maximum CCA write-off that could be taken by Kreton Inc. for the taxation year ending December 31, 2018.

2. As Kretons tax advisor, indicate how much CCA you would advise them to take for the 2018 taxation year and the specific classes from which it should be deducted. Provide a brief explanation of the reason for your recommendation. In providing this advice, do not take into consideration the possibility that losses can be carried either back or forward.

TIF Problem Five - 12

CCA And Tax Planning

For the taxation year ending December 31, 2018, Kreton Inc. has determined that its Net Income For Tax Purposes, before any deductions for CCA, amounts to $51,000. As the Company does not have any Division C deductions, Taxable Income, before any deductions for CCA, would also amount to $51,000.

Test Item File Problems for Canadian Tax Principles 2018 - 2019 161

TIF PROBLEM FIVE - 13

CCA And Tax Planning

On January 1, 2018 the Company has the following UCC balances:

Class 1 (Two Buildings) Class 13* Class 10

$462,000 94,500 139,000

*This balance reflects leasehold improvements made on January 1, 2016 at a total cost of $126,000. The original term of the lease was 4 years. However, there are two available renewal options, each allowing Axel Ltd. to renew for a period of two years.

During 2018, the cost of additions to Class 10 amounted to $76,000, while the proceeds from dispositions in this class totalled $58,000. In no case did the proceeds of disposition exceed the capital cost of the assets disposed of, and there were still assets in the class as of December 31, 2018.

There were no acquisitions or dispositions in either Class 1 or Class 8 during 2018. However, Axel has received an unsolicited offer to purchase one of its buildings which it is considering.

Required:

1. Calculate the maximum CCA that could be taken by Axel Ltd. for the taxation year ending December 31, 2018. Your answer should include the maximum that can be deducted for each CCA class.

2. As Axel's tax advisor, indicate how much CCA you would advise them to take for the 2018 taxation year and the specific classes from which it should be deducted. Provide a brief explanation of the reason for your recommendation. In providing this advice, do not take into consideration the possibility that losses can be carried either back or forward.

TIF Problem Five - 13

CCA And Tax Planning

For its taxation year ending December 31, 2018, Axel Ltd. has determined that its Net Income For Tax Purposes, before any deductions for CCA, amounts to $42,000. The Company does not have any Division C deductions, so whatever amount is determined as Net Income For Tax Purposes will also be the amount of Taxable Income for the 2018 taxation year.

Test Item File Problems for Canadian Tax Principles 2018 - 2019 162

TIF PROBLEM FIVE - 14

CCA Calculations Including CEC Transition

The following information relates to Andorn Ltd. for its taxation year that ends on December 31, 2017:

1. The Company has UCC balances on January 1, 2017 for its tangible assets as follows:

Class 1 (A single building acquired in 2008) Class 8 Class 10 Class 13

$478,695 243,000 126,000 127,500

2. During 2017, the building that was acquired in 2008 was sold for cash of $650,000. Of this total, $125,000 represented the value of the land on which the building was situated. The building had a capital cost of $625,000, of which $80,000 represented the value of the land at time the building was acquired.

   The building was replaced during 2017 with a new building at a cost of $745,000, of which $125,000 represented the value of the land.

   The old building was used 100 percent for office space and was allocated to a separate Class 1. The new replacement building is also used 100 percent for office space and is allocated to a separate Class 1.

3. During 2017, the Company purchased office furnishings for $74,000. They traded in older furnishings and received an allowance of $17,000. The capital cost of the furnish- ings that were traded in was $56,000.

4. The only vehicle purchased during the year was a Lexus to be used by the president of the Company. The cost of this car was $93,000. The president drives it 23,000 kilometers during the year, of which 5,750 kilometers are for employment related purposes.

5. Andorn conducts some of its business out of a building which it leases. The lease was signed on January 1, 2015 and had an initial term of 7 years. It has an option to renew for 3 years. At the time the lease was signed, Andorn spent $150,000 on leasehold improve- ments.

6. During 2015, the Company purchased two franchises. The first, which was purchased on August 1, 2015, had cost $62,000 and a legally limited life of 8 years. The second, pur- chased on September 5, 2015, cost $84,000 and had an unlimited life. This second franchise was sold during 2017 for $65,000.

7. Andorn Ltd. has always deducted the maximum CCA and the maximum write-off of cumu- lative eligible capital allowable in each year of operation.

Required: Calculate the maximum CCA write-off that can be deducted for 2017. Your answer should include the maximum that can be deducted for each CCA class. In addition, indicate the amount of any recapture or terminal loss that results from dispositions during 2017.