depreciate with confidence! - cch · –building construction / alterations on leased land •...

Depreciate with Confidence! Speaker: Jeremy Bergen

1

Purpose

2

• Based on history of reviewing tax returns

• Unintentional oversight by CRA and Accountants

• Attention to detail and law is key

• It’s not called “depreciate overconfidently”

Overview

3

• Major Classes overview

• Detail review – class 16, class 10, class 10.1

• What is a work vehicle?

• Fast Depreciating Classes

• Other Classes

• Eligible Capital Property

• Capital Dividend Account (Sch. 8 vs Sch. 10)

• Buildings

• Replacement Property Rules

• CRA Observations

• Questions

Major Class Oversimplification

4

• Class 1 Buildings 4%

• Class 6 Fence, Greenhouse 10%

• Class 8 Catch – all 20%

• Class 10 Automobiles 30%

• Class 10.1 Expensive cars 30%

• Class 12 Software 100%

• Class 13 Leaseholds life

• Class 14 Patents / Franchise fee life

• Class 16 Large Trucks 40%

• Class 29 Manufacturing Equip. 50%

• Class 50 Computer Hardware 55%

Overview vs. Detail – Class 16

Large Trucks, or…

• (d) a taxicab,

5


Large Trucks, or…

• (e) a motor vehicle that

– (i) would be an automobile as that term is defined in subsection 248(1) of the Act, if that definition were read without reference to paragraph (d) thereof,

– (ii) was acquired for the purpose of renting or leasing, and

– (iii) is not expected to be rented or leased to any person for more than 30 days in any 12 month period,

-------------------------------------------------------------------------------

6


Large Trucks, or…

• (e) a motor vehicle that

– (i) would be an automobile as that term is defined in subsection 248(1) of the Act, if that definition were read without reference to paragraph (d) thereof,

– (ii) was acquired for the purpose of renting or leasing, and

– (iii) is not expected to be rented or leased to any person for more than 30 days in any 12 month period,

-------------------------------------------------------------------------------

• What is an Automobile?

• Paragraph 248(1)(e)(ii) excludes pick-up trucks and vans used primarily for transporting passengers or goods

• pick-up trucks and vans stay in class 10

7


Large Trucks, or…

• (g) a truck or tractor designed for hauling freight, and that is primarily so used by the taxpayer or a person with whom the taxpayer does not deal at arm's length in a business that includes hauling freight, and that has a “gross vehicle weight rating” (as that term is defined in subsection 2(1) of the Motor Vehicle Safety Regulations) in excess of 11,788 kg.

---------------------------------------------------------------------

8


Large Trucks, or…

• (g) a truck or tractor designed for hauling freight, and that is primarily so used by the taxpayer or a person with whom the taxpayer does not deal at arm's length in a business that includes hauling freight, and that has a “gross vehicle weight rating” (as that term is defined in subsection 2(1) of the Motor Vehicle Safety Regulations) in excess of 11,788 kg.

---------------------------------------------------------------------

But…

• Concrete trucks are class 38 @ 30%

• Dump Trucks hauling earth or rocks are Class 38

• Dump Trucks hauling Garbage are class 16, as “Freight” includes Garbage

– CRA Doc. 2009-0330041C6

• Trailers (highway and railway) are class 10(e) @ 30%

9

Major Class Simplification

10

Oversimplification of Class 16 (40%)

• Large Trucks

Simplification of Class 16 (based on ITA, CRA and court cases)

• Taxicab

• Short term rental vehicles – excluding vans and pick-up trucks

• Trucks and Tractors > 11,788kg – Excluding concrete trucks, dump trucks hauling earth, and trailers

– Including dump trucks hauling garbage.


Automobiles, or…

(a) automotive equipment, including a trolley bus,

--------------------------------------------

11


Automobiles, or…automotive equipment?

(a) automotive equipment, including a trolley bus,

--------------------------------------------

Motor Vehicles is a restricted definition of Automotive Equipment

(IT 248(1)):

an automotive vehicle designed or adapted to be used on highways and streets but does not include

(a) a trolley bus, or

(b) a vehicle…operated exclusively on rails;

Automotive > Motor Vehicle

12



Automobile is a restricted definition of Motor Vehicles. (IT 248(1)):

(a) a motor vehicle that is designed or adapted primarily to carry individuals on highways and streets and that has a seating capacity for not more than the driver and 8 passengers,

• but does not include

(b) an ambulance,

(b.1 / b.2) a clearly marked emergency-response vehicle…

(c) …a taxi, a bus …or a hearse…

(d) …a motor vehicle acquired to be sold, rented or leased…

(e) a van or pick-up truck, or a similar vehicle,

Automotive > Motor Vehicle > Automobile

13



Automotive means it moves itself.

Not defined in the Income Tax Act, so the plain meaning is relevant.

Includes:

• Outboard motors & hovercrafts (IT 285R2 – CCA, Par 4)

• All-terrain vehicles, (CRA Doc. 2002-0141367

• Motor homes (CRA Doc. 2003-0045525)

• Self-propelled farm equipment (CRA Doc. 2011-0402501E5)

• Fork Lift? • Class 10 30%

• Class 29 50% (if used in manufacturing per Haliburton v. R, 1985)

• Class 41 25% (if used in heavy crude or CDN field processing)

• Class 38 30% (if fitted to move concrete or earth)

14


15

Oversimplification of Class 10 (30%)

• Automobiles

Simplification of Class 10 (based on ITA, CRA and court cases)

• Automotive Equipment

• Plus: – A new railway locomotive

– Canadian film or video production

– Certain mining, oilfield and forestry assets (including some roads)

– Contractor’s moveable equipment for use in a construction business

– Portable tools for rent

– Trailers, and

– Data processing equipment and software

Class 10 vs. Class 10.1

Class 10 Class 10.1

CCA rate 30% 30%

Group all vehicles in one class Yes no

List each vehicle separately no Yes

Maximum capital cost No Yes

50% rule on acquisitions Yes Yes

Half-year rule on sale No Yes

Recapture on sale or trade-in Yes No

Terminal loss on sale Yes No

16

Overview vs. Detail – Class 10.1

Class 10.1

Property that would otherwise be included in Class 10 that is a passenger vehicle, the cost of which to the taxpayer exceeds $20,000 or such other amount as may be prescribed for the purposes of subsection 13(2) of the Act.

– Passenger Vehicle means an automobile bought after 1987

– $30,000 plus sales tax is the current price limit

– Regulation 7307(1)(b) and ITA 13(2)

17

10.1 vs. the Work Truck

Passenger Vehicle means an automobile bought after 1987

The definition of automobile excludes:

• A pick-up truck used primarily (>50%) at a remote work site in the taxation year of purchase.

• A van or pick-up truck

– With seating capacity of not more than 2 passengers that is used primarily (>50%) for the transportation of goods and equipment in the course of gaining or producing income in the taxation year of purchase.

or

– Is used all or substantially all (>90%) for the transportation of goods and equipment in the course of gaining or producing income in the taxation year of purchase.

18

What is a Work Truck?

The 50% or 90% rule hinges on the number of “Passenger seats”.

In an extended-cab truck:

– Removing the back seats and screwing down a tool box sufficiently modifies the truck. (Jorgenson v R., 2009 TCC 37)

– Folding up the back seat is not enough (Fraser v R., 2006 TCC 427)

– Not using the back seats is not enough (Cohoon, Murphy v R., 2006 TCC 376)

– Removing seats that can be put back in is not enough (CRA Doc 2001-0073855)

– Back seats that are jump seats, or are small enough not to provide an ordinary adult sufficient comfort or safety may not qualify as an additional seat. (Muller v R., 2004 TCC 562, CRA Doc 1997-9632678 disagrees)

Rules don’t work with cars.

19

What is a Work Truck?

The 50% or 90% test applies when the vehicle:

“is used in the taxation year in which it is acquired or leased…for the transportation of goods, equipment or passengers in the course of gaining or producing income”.

Consider:

• December 31 purchase with no use in the year, vs.

• December 1 purchase with 90% use in December, and 50% use in January

• January 1 purchase with 90% use throughout the year

• December 31 purchase with no insurance = not able to depreciate as does not pass the “in use” test.

20


21

Oversimplification of Class 10.1 (30%)

• Automobiles > $30,000 plus sales tax

Simplification of Class 10.1 (based on ITA, CRA and court cases)

• Automobiles > $30,000 plus sales tax

• Excludes: – Pick-up truck used at a remote work site (>50%)

– Pick-up Truck or Van used to move equipment or passengers in year of purchase:

• >50% use with seating restrictions

• >90% use without seating restrictions

Fast Depreciating Classes

Manufacturing – class 29

• 25% / 50% / 25% under 1100(1)(ta)

• Property made or purchased before 2016

• Used in Canada, directly or indirectly and primarily

– in manufacturing or processing of goods for sale or lease, or

– leased out for manufacturing or processing where the principal business of the company is leasing.

• That would otherwise be in class 8, that is a water or oil storage tank, or that is a powered industrial lift truck (i.e., a forklift).

• 1104(9) List the exclusions from Manufacturing (different definition from PST legislation)

• Farming or fishing

• Logging

• Construction (see CRA online definition)

• Resource / energy sector restrictions

22


Software

Class 12(o) – 100% (1/2 year rule)

– Computer software acquired after May 25, 1976

– Includes all application software

– Can include training / installation costs

Excludes Systems Software

• Definition in 1104(2)

– Processes other application software,

– Helps a computer function and provide security

23


Computer Equipment

Class 50, 55% (½ year rule)

Includes

– General-purpose electronic data processing equipment (GPDP)

– Ancillary data processing equipment

– Related systems software

Excludes

– Electronic process control or monitor equipment

– Electronic communications control equipment


– Data handling equipment (not related to GPDP)

24

Other Classes

Class 46 – 30% (½ year rule)

– Data Network Infrastructure Equipment


Excludes

– Anything that wouldn’t have otherwise been included in class 8

Data network infrastructure equipment

• Definition in 1104(2)

– Equipment that controls or directs data

– Includes switches, routers, servers, hubs, modems

– Excludes

• Small network equipment (<64kb per second)

• Non-digital transmission Radio Equipment

• Unidirectional broadcast equipment

• Wires, cables, structures, telephone sets

25

Other Classes

Class 8 – 20% (1/2 year rule)

• Anything else, including amounts excluded from class 50, such as:

– electronic process control or monitor equipment

– electronic communications control equipment


– Data handling equipment (not related to GPDP)

• Anything not “general purpose” (class 50) and not related to the “network infrastructure” (class 46).

26

Other Classes

Leaseholds

• Half-year rule applies

– Reg. 1100 (1)(b)(i)

• Doesn’t apply to:

– Most resource properties

– Building construction / alterations on leased land

• Schedule III rules on how to depreciate

– Depreciation period includes 1 renewal period

– Minimum 5 year depreciation time

– Calculations by property, but class rules still apply

• No terminal loss if other assets still in class

• Regular amortization continues if not fully amortized

• Leaseholds can qualify as replacement property

27

Eligible Capital Property

Eligible Capital Expenditures

• Asset Types – ITA 14(5) & IT-143R3

– A capital outlay made to earn income from a business, but excluding depreciable property.

• Goodwill

• Some Accounting, Legal, Appraisal Fees,

• Some customer lists

• Purchased trademarks and non-limited life assets

• Reorganization and incorporation expenses

• Milk and other farm quotas

• Pool = Cumulative Eligible Capital

• Amortization = 7% of CEC under ITA 20(1)(b)

28


Potential Changes!

• 2014 Federal Budget

– Public Consultation to eliminate the Eligible Capital Property rules with a new class of depreciable property.

• Current:

– 7% deduction of 75% of Eligible Capital Expenditure

• Proposed:

– 5% depreciation on 100% of asset price

– May be a separate class for goodwill

• Proposed Transitional Rules

– Ending CEC pool would transfer to a new CCA class, and continue to depreciate at 7%

• No draft legislation proposed as of Jan 23, 2015

29


Impact of Potential Changes!

• Current rules on a sale of ECP:

– Effective 50% income inclusion.

– 50% addition to CDA at the end of the year

– CDA pool separate from CDA pool on capital gains

– Tax at ACTIVE rates, may be eligible for the SBD

• Proposed rules on a sale of ECP:

– 50% income inclusion on capital gain

– Addition to CDA when realized

– CDA pool netted with other capital assets

– Tax at PASSIVE rates, RDTOH accumulates

30


Calculation Example:

– Opening: $100,000 original cost 25,000

– Addition: 100,000 * ¾ = 75,000

– Disposition: 1,000,000 * ¾ = 750,000

– CEC balance at year end ( 650,000)

– Positive amount 650,000

– Less: CEC deductions in Prior Years (50,000)

– Balance 600,000

– Taxable Portion = 2/3 of amount above 400,000

– Add: CEC deductions in Prior years 50,000

– Taxable Income 450,000

– CDA = $400,000

– Tax = 13.5% = $60,750 (26% = $117,000)

31

Schedule 8 Property

Calculation Example:

– Opening: $100,000 original cost 50,000

– Addition: 100,000 100,000

– Disposition: 1,000,000 100,000

– UCC balance before amortization 50,000

– Recapture 0

– Capital Gain: $1,000,000 - $100,000 900,000

– Taxable Capital Gain: 450,000

– CDA $450,000

– Tax = $205,550 ($120,000 refundable, $82,550 non refundable)

32

Capital property vs. ECP

Capital Property ECP

– Unamortized Cost 50,000 0

– Recapture 0 50,000

– Taxable Capital Gain 450,000 0

– Taxable Active Income 0 450,000

CDA 450,000 400,000

Income Tax 202,550 60,750

Impact on:

- Asset Sales

- Hybrid Sale Transactions

33

Buildings

What is a Building?

– “A building or other structure, or a part of it, including any component parts such as electric wiring, plumbing, sprinkler systems, air-conditioning equipment, heating equipment, lighting fixtures, elevators and escalators.”

– Definition under Schedule II, Class 1, Par (q)

– Anything beyond that definition could be “leasehold improvements”

34

Buildings Class 1 Class 1a Class 1b

CCA rate 4% 10% 6%

½ year rule Applies

Group vs. separate Group Separate

ITA 1100 (1)(a)(i) (1)(a.1) (1)(a.2)

M&P in Canada - >90% -

Non-residential use - - >90%

Use at end of the year - Relevant

Election Required - 1101(5b.1)

Late Filing of Election - No

Prescribed Form - No

Used before 3/19/2007 OK Not OK

Additions / Alterations Allowed Allowed. >90% test applies on a separate building basis.

35

Buildings

Class 1, 1a & 1b

Residential use

– Intended use matters

– Use at end of year matters

– Short-term rental use (i.e., hotel) is not “residential”

CRA Doc 2010-0361081E5

Reg. 1103(1)

– Election available to transfer Class 2-12 assets to Class 1.

36

Buildings

Separate Class Election

– Each building elected to be in class 1a or class 1b is put in a separate class.

– Properties in the same class, but used in different businesses, are put into separate classes. (Reg. 1101(1))

– Rental properties in excess of $50,000 put in separate classes

– Units in the same building are amalgamated (Reg. 1101(1ac))

37

Buildings – Capital or Expense

Elevators

– Court cases indicate replacement and repairs are usually capital

Other Components (roof, floors, pieces)

– Has there been an improvement?

– What condition was the building in when it was purchased?

• Is the outlay of better value than the time at which the building was purchased?

Example: Replace a floor cover (carpet)

– On an old building purchased 5 years ago.

• Floor was used when purchased, new floor has a longer life.

– On a building constructed 15 years ago.

• Original floor had a 15 year life,

• Replacement floor has a 15 year life.

38

Buildings – Available For Use

Available for use rules, depreciable at the earliest of:

– Completion of construction,

– Time you begin to use >90% of the building for its intended purpose,

– The rolling start rules:

• “the time that is immediately after the beginning of the taxpayer's first taxation year that begins more than 357 days after the end of the taxpayer's taxation year in which the property was acquired by the taxpayer,

• (Interpretation: If you buy it this year, but don’t use it this year or next, you can begin to depreciate the building the following year)

ITA 13(28)(c)

39

Buildings – Uneven Losses

Section 13(21.1)

– Proceeds of building < Cost and UCC

• Proceeds are reallocated from land to building

• If building is in a pool, may need to calculate the specific capital cost of that building

40

Replacement Property Rules

41

Qualifying property is either:

• Compensation received in a taxation year for depreciable property

– Unlawfully taken,

– Destroyed and amounts received under insurance

– Taken under statutory authority / notice of intention to expropriate under statutory authority

Or

• Compensation for real or immovable property used in a business

– Excludes rental property

References:

– 13(4) – Deferral of Recapture

– 44(1) – Deferral of Gain

– 14(6) – Replacement of ECP

– CRA IT-259R4


42

ITA 44(1) and (2) – Timing of disposition

• Replacement property must be purchased within __ years from the year an amount became receivable as proceeds of disposition.

– Involuntary: 2 years (24 months)

– Voluntary / ECP: 1 year (12 months)

• Amount becomes receivable at the earliest of:

– Date the amount of compensation is agreed

– Date court makes determination

– 2 years post-loss on the property (if not taken to court)

– On death or emigration

– On a taxable wind-up (non-taxable ok)

• Example:

2012 Expropriation = 2014 Receivable = 2016 deadline for purchase of replacement property.

Why not agree to comp. on Jan 1 vs. Dec?


43

• What is a replacement property?

– Reasonable that property was acquired by the taxpayer to replace the former property

– n/a if expansion or diversification

– Same or similar:

• USE by the taxpayer or related taxpayer

– n/a to unused land or inventory

– n/a if new property has significant new uses

– A building under construction may not be in use

• BUSINESS by the taxpayer or related taxpayer

– n/a if for use of a separate business unit

– Must be Taxable Canadian Property before and after

• Use by RP ok, but purchase by RP not ok:

• See ITA 44(5)(b) and Ruling 2006-0185251R3

• Applies to taxpayers: partners and non-residents ok


44

• Election is required

– On return, if replacement happens in one year

– By letter, if replacement happens in a separate year.

– Late filed may be possible.

• If Replacement is in a subsequent year

– Pay taxes in year 1 (or post security)

– Amend return once replacement property bought

– Interest may accrue if tax not paid, but reversed if replacement property acquired

Other Rules:

– 2 for 1, or 1 for 2 properties ok, if other rules met.

– Calculate on an asset by asset basis.

– Joint purchase / sale issues exist, as rules apply per taxpayer by asset.

– Reserve available under 44(1)(e)(iii)

– Election to allocate gain between land & building under 44(6)

Rep. Prop. - Impact of Rules

45

Old New

Cost 100,000 700,000

UCC 80,000 n/a

Proceeds 900,000 n/a

No Election Election Change

UCC Start 80,000 80,000

13(4) (100,000) (80,000) 20,000

UCC End 0 0

Recapture 20,000 0 (20,000)

Gain 44(1)(e) 800,000 200,000 (600,000)

Cost 44(1)(f) 700,000 100,000 (600,000)

Tax ($182,680) ($45,670) ($137,010)

CDA 400,000 0

Rep. Prop. - Impact of Rules

46

• Intention of rules is understandable, but application of the rules gets complicated fast…especially when a replacement property gets replaced.

• Consider: do I want to really access the RP Rules?

– Likely yes, if you have a lot of recapture

• Deferring recapture (immediate tax)

• Not increasing cost base (tax shield on amortization)

BUT

– Maybe not if you have low recapture and a high gain,

• Deferring a capital gain (50% subject to tax)

• Not increasing cost base (tax shield on amortization)

• Not accessing CDA

• Calculate the impact of these rules before electing to using them.

Related Party Transactions

47

No ½ year rule on purchase from a non-arm’s length person of:

• Depreciable property

– Does not apply if transferor is not subject to Canadian tax

• That was owned >364 days by transferor

– Or transferor acquired from another related transferor (1100(2.2))

• Who can claim CCA on a wind-up of a subsidiary? – Subsidiary corporation has no assets at year end

• May impact tax payable in subsidiary

– Parent corporation has the assets at year end • May impact tax payable in parent company

• Consider impact that staggered year-ends could have.

Manual Adjustments

48

UCC is always the maximum allowed.

Modify if:

• Accumulating losses will expire

• Depreciation on rental buildings restricted

What to modify first?

• Fast-depreciating classes

CRA Approach

49

• Lots of written information available

• Lots of good court cases

• Practical Experience:

– Untrained Auditors: miss issues and discussions

– Trained Auditors: unreasonable and overconfident

– Get a ruling if you are unsure, otherwise your choice may be the risk between no questions asked and going to court (or settling) after a prolonged dispute with the auditor.

• Less of a problem of the CRA finding things, and more of a problem of taxpayers not being aware of the rules.

Items not Covered

50

• Specified Leasing Properties

• Resource / Aerospace / Energy Sector Assets

This webinar is brought to you by Wolters Kluwer and in

partnership with Jeremy Bergen Inc.

For more information please contact customer service at

1-800-268-4522.

Visit www.cch.ca/ExpertEdge for a full list of our webinars.

51

Jeremy Bergen Inc. Langley, BC

778-245-9190

[email protected]

www.jbergentax.com

http://www.cch.ca/ExpertEdge

mailto:[email protected]

depreciate with confidence! - cch · –building construction / alterations on leased land •...

Documents