3.d Capital Cost Allowance (Lecture 31)

Consider the following sequence of events:

• The relevant tax rate for your firm is t = 27%.
• Your firm buys a drilling machine for $6,000 in 2021. At the time of purchase, this is your firms first and only Class 8 asset. The CRA-determined depreciation rate for Class 8 assets is 20% per year.
• In 2029, your firm sells the drilling machine for $100.92, and buys a new one for $6,000.
• In 2038, your firm sells the drilling machine for $100.92. In doing so, it has sold its last Class 8 asset.
• Your firm always claims the maximum CCA each year (as in the lecture examples).

i. Calculate the firms Class 8 remaining UCC after the sale in 2038.

Remaining UCC: ______________________

[Work]

ii. Since your firm is closing out its Class 8 account in 2038, any remaining non-zero UCC is either a terminal loss or a recapture.

In 2038, will your firm face a terminal loss, recapture, or neither from Class 8?

(Terminal Loss/Recapture/Neither) _______________________________

[Briefly explain your reasoning]

iii. Assume the relevant tax rate is t=27%, and your firms taxable income is over $900,000. By how much will this terminal loss or recapture increase or decrease the taxes your firm has to pay in 2038? Briefly explain your reasoning.

(Hint: This is not a trick question. Given your answers to parts i. and ii. and the information given, it should be very straightforward.)

Change in tax bill for the 2038 tax year: ___________________

[Briefly explain your reasoning]