Depreciation of Assets:
CCA and UCC
Purchase of Asset: Asset Class and CCA
§ Every capital asset is assigned to a specific asset class by the government
§ Every asset class is given a depreciation method and rate
§ Here it is
§ CCA is depreciation for tax purposes
§ CCA is deducted before taxes and acts as a tax shield
§ CCA is a cost, like depreciation expense was a cost in accounting
§ Once you deduct CCA, you’re earnings before interest and taxes is lower
CCA as Tax Shield
CCA (depreciation) reduces the tax burden of the company
The company on the right has a lower net income, but less taxes (CCA is a tax shield)
- Fictious expense company doesn’t have to pay any cash (ex: depreciation)
- Whereas with taxes, companies have to pay real cash (better to pay less)
- Income before taxes reduced by $400 – 300 = $100 = the amount of CCA
- Taxes reduced by = $120 – 90 = $100 X 30% = $30
Usage of Asset: Two rules
§ Half-year Rule – In the first year, only half of the asset’s cost can be used for CCA
purposes irrespective of when the asset is procured
§ Example: Bossman Corporation purchased $100,000 worth of photocopiers in
2017. Photocopiers fall under asset class 8 with a CCA rate of 20%. How much
CCA will be claimed in 2017?
§ Using half-yearly rule CCA for first year: $100,000 * 50% * 20% = $10,000
§ Declining Balance UCC: Each subsequent year’s CCA is calculated on the
lowered/declined ending UCC of the previous year
§ Example: How much CCA will Bossman claim in 2018?
§ Ending UCC in 2017 = Beginning UCC – CCA = $100,000 – 10,000 = $90,000
§ CCA for 2018 = $90,000 * 20% = $18,000
§ In Canada, you will always assume a newly purchased asset will be following the half-
year rule
§ UCC: Undepreciated capital cost (the amount of price that has not been depreciated yet)
§ Each year CCA will be calculated on the declined amount of CCA
Disposition of Asset
• Scenario 1: When the last asset in an asset class is sold, the asset class is terminated.
• Scenario 2: When an asset is sold and there are other assets in the asset class, the asset
class continues.
• Scenario 1:
• When the last asset in an asset class is sold, the asset class is terminated. This can result
in a terminal loss or recaptured CCA.
• Terminal Loss – The difference between the UCC and the disposal value when
the UCC is greater.
• Recaptured CCA – The difference between the disposal value and the UCC when
the UCC is smaller. This amount is taxable.
• If the asset is sold at a higher price than the original purchase price capital gains
needs to be recorded
• This is our base case assumption. If nothing is mentioned in a problem, we
will assume scenario 1 holds.
• Once the company recognizes a terminal loss, they will be able to take a tax
deduction because they have suffered a loss
• Once the company recognizes capital gains, they will have to pay taxes on the
recaptured amount of CCA
• Charging higher CCA is taking advantage of the tax shields in earlier years (that’s
why companies need to pay more now recapture CCA difference between
the salvage value and the ucc of the asset
• Recorded as gain on sale of an asset in the income statement
• CCA recaptured when the salvage value is higher than ucc but lower than the
original purchase price of the asset
• Terminal loss when the salvage value is lower than ucc
• Recorded as loss on sale of an asset in the income statement
• 50% of capital gains is taxable whereas recapture of CCA is fully taxable
• Scenario 2:
• Usually firms have multiple machines in an asset class.
• When an asset is sold and there are other assets in the asset class, the asset class is
reduced by the realized value of the asset, or by its original purchase price,
whichever is less.
• If the asset is sold at a higher price than the original purchase price capital gains
needs to be recorded.
