Capital assets provide an enduring benefit to your business over time. These assets are divided into depreciable property, such as buildings or equipment, and non-depreciable property, such as land. Depreciable property is subject to annual depreciation claims under the capital cost allowance (CCA) system. These annual CCA claims create added complexity when calculating the tax impact of a future sale of these assets.
There are two different amounts that you need to keep track of in respect of depreciable property:
Adjusted cost base (ACB)—the original purchase price of the asset, plus any additions over time. ACB is tracked for each individual asset.
Undepreciated capital cost (UCC)—the capital cost of the asset, less the cumulative amount of CCA claims. UCC is tracked based on classes of assets rather than for each individual asset. For example, most computers would be grouped together in class 50 and CCA is calculated based on the total UCC of the class.
At the time of disposition, the ACB is used to determine if there is a capital gain on the disposition. There is a capital gain if the proceeds of disposition, less any selling costs, exceeds the adjusted cost base. Capital gains are subject to a 50% inclusion rate based on current tax law, meaning that half of the total capital gain is included in taxable income for the year. A capital loss can never be claimed on depreciable property.
The UCC is used to determine if there is either recapture or a terminal loss on the disposition. When assets are sold, the lesser of the capital cost or proceeds of sale is recorded as a reduction to the UCC. Recapture will occur if the balance of the class is negative after this reduction and the full amount must be included as part of taxable income for the year. This income inclusion reflects the fact that the business benefitted from prior year CCA claims, and then ultimately recovered these amounts as part of the proceeds of disposition. For assets that you expect to be subject to recapture, it may not always be advisable to claim CCA. This depends on various factors such as your time horizon for owning the asset and the expected tax rate during the year of disposition.
A terminal loss occurs if there is a positive balance remaining in the class after the reduction is recorded, and there are no other assets remaining in the class. The remaining balance of the class can be deducted in full as part of the annual CCA claim. If assets remain in the class, then the remaining balance continues to be subject to annual CCA claims based on the rate of the class.
The tax impact of selling depreciable property can be complex, particularly for the sale of significant assets such as buildings.
For more information, please contact firstname.lastname@example.org or 1 844-GYTD-CPA