Calculate the minimum recapture of CCA on the disposal of the warehouse. Income tax reference: ITA 13(1), (4) — Noluck Enterprises has December year end March 20X6 company was
Accounting & FinanceTaxationWorked Solution
Noluck Enterprises has a December 31 year end. On March 20, 20X6 the company’s warehouse was destroyed by fire. The original cost of the warehouse was $120,000. At the time of the fire, the warehouse was valued at $300,000 and was insured. Class 1 had a UCC balance of $95,000 at December 31, 20X5. Noluck was forced to lease a warehouse until a new one could be acquired. On November 30, 20X8, Noluck purchased a new warehouse costing $325,000. Assume the new warehouse was constructed after May 18, 2007.
Calculate the minimum recapture of CCA on the disposal of the warehouse. Income tax reference: ITA 13(1), (4).
SOLUTION
[ITA: 13(1), (4); Involuntary disposition]
Class 1:
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20X6:
UCC balance, beginning of year
$ 95,000
Purchases
$ 0
Disposals (limited to original cost)
(120,000)
(120,000)
(25,000)
Recapture of CCA
25,000
UCC balance, end of year
$ 0
When the disposition is involuntary and recapture occurs, the taxpayer is permitted to defer recognition of the recapture if property with a similar use is acquired within 2 years or 24 months after the taxation year in which the forced disposition occurs [ITA 13(4)].
The new warehouse was acquired on November 30, 20X8 which is within the 2-year time limit. Noluck should attach a letter to its 20X8 tax return indicating that an election under ITA 13(4) is being made to defer the 20X6 recapture. The letter should include an amended calculation of the 20X6 recapture as follows:
20X6 Amended:
UCC balance, beginning of year
$95,000
Purchases
0
Disposals (limited to original cost)
$(120,000)
Reduced by the lesser of:
Normal recapture $25,000
Cost of new warehouse $325,000
25,000
(95,000)
Recapture of CCA
$ 0
If the disposition of the warehouse was voluntary, the new warehouse would have to be acquired by December 31, 20X7, being 1 year after the end of the 20X6 taxation year, in order to defer the recapture.
If the new warehouse is placed in a separate CCA Class it will qualify for an additional allowance of 2% bringing the CCA rate to 6%. The 6% rate applies for buildings that were not used by anyone prior to March 19, 2007, where more than 90% of the floor space of the building is used at the end of the year for a non-residential use [Reg 1100(1)(a.2)].