Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

Chapter 5 Self-Study Problems (SSPs)

NOTE: The immediate expensing rules have undergone considerable change since they were first
announced in 2021 which is now reflected in detailed draft legislation which should become law in mid
to late 2022.

It is important to remember that these rules are temporary in that they only apply for 2022 and 2023 for
CCPCs and 2022 to 2024 for individuals whereas the AccII rules apply for a much longer period to the
end of 2027. Given this situation the exercises, self-study problems and assignment problems do not
cover the immediate expense rules and instead focus on the AccII instead.

We do however recognize the importance of immediate expensing and have endeavoured to provide
problem material that allows students to practice working with these new rules. As a result we have
provided alternate versions of SSP 5-1, SSP 5-7, AP 5-2 and AP 5-4 to incorporate immediate expensing.
These revised problems and SSP solutions can be found in MyLab under Chapter Resources/Updates.

Solutions are available in the Study Guide.

SSP 5–1 CCA and Tax Planning

For its taxation year ending December 31, 2022, Northcote Inc. has determined that its net
income, before any deduction for CCA amounts, is equal to $328,000. The company does not
have any taxable income deductions, so whatever amount is determined as net income will also
be the amount of its taxable income for the year.

On January 1, 2022, the company has the following UCC balances:

Class 1 (Building purchased in 2006) $2,597,000

Class 8 718,000
Class 10 524,000

In 2022, the capital cost of additions to Class 10 amounted to $374,000, while the proceeds
from dispositions in this class totaled $234,000. In no case did the POD exceed the ACB (e.g.,
capital cost) of the property sold and property remained in the class on the last day of the
taxation year.

There were no purchases or dispositions in either Class 1 or Class 8 in 2022.

Required:
A. Calculate the maximum CCA that could be claimed by Northcote Ltd. for the 2022
taxation year. Your answer should include the maximum that can be deducted for each
CCA class.
B. As Northcote’s tax advisor, indicate how much CCA you would advise the company to
claim for the 2022 taxation year, and the specific classes from which it should be
deducted. Provide a brief explanation of the reasons for your recommendation. In
providing this advice, do not take into consideration the possibility that losses can be
carried either forward or back.

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 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

SSP 5–2 CCA Calculations

Mr. Marker has been the sole proprietor of Marker Enterprises since its establishment 10 years
ago. The business uses a calendar-based fiscal period ending December 31 and, on January 1,
2022, the following information with respect to its depreciable property is as follows:

Type of Depreciable Undepreciated CCA

Property Capital Cost (UCC) Capital Cost Rate
Building (Class 1) $115,000 $190,000 4%
Equipment (Class 8) 96,000 130,000 20%
Vehicles (Class 10) 6,700 30,000 30%
Equipment (Class 53)* 75,000 100,000 50%

*The manufacturing and processing equipment was acquired in 2021 and the business
did not claim the maximum CCA for that year.

Other Information:

1. During the 2022 fiscal period, Mr. Marker’s business purchased additional Class 8
equipment at a total cost of $52,000. This new equipment replaced equipment that had a
capital cost of $75,000, which was sold during the year for $35,000.

2. During the 2022 fiscal period, Mr. Marker purchased a used automobile to be used in the
business for $8,000. Also during this year, Mr. Marker sold one of the trucks that was
used in the business for $25,000. This truck, which had a capital cost of $20,000, was
sold above its cost as the result of its extra features, which were no longer available on
newer models. None of the vehicles are zero-emission.

3. As the result of a decision to lease its premises in future years, Mr. Marker sold the
building for $260,000. Of the $260,000 received, $150,000 is for the land on which the
building is situated and the remaining $110,000 was for the building. The ACB of the
land was $150,000.

Required: Calculate the total effect of all the preceding information on Mr. Marker’s 2022
business income. Assume that all the properties acquired in 2022 would qualify for the AccII.
Your answer should include the maximum CCA that can be claimed by Mr. Marker for each
class. In addition, calculate the January 1, 2023, UCC balance for each class. Ignore any
GST/HST and PST considerations.

SSP 5–3 CCA Calculations over Four Years

NOTE TO STUDENTS This problem looks to CCA calculations for a partnership made
up of individual partners. While partnerships are not discussed until Chapter 19,
determining CCA, recapture, terminal losses, and UCC for depreciable property follows
the same rules as would be the case for any other business, whether carried on as a
sole proprietorship or by a corporation.

After several years of hard work at the Shawarma Palace Lebanese restaurant, the Haddad
brothers decided to form a partnership to carry on a business that was registered as Shawarma

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 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

On Wheels. The business offered quick delivery of freshly made Lebanese food. The
partnership began carrying on business September 1, 2019, and chose a calendar-based fiscal
period ending December 31. The partnership claimed maximum CCA in every year.

On September 1, 2019, the partnership purchased 20 compact cars to use for deliveries. These
vehicles cost $21,500 each. None of the cars are zero-emission. The brothers ran a very
successful advertising campaign using online coupons and social media that was directed at
downtown condo owners.

In the 2020 fiscal period, six additional compact cars were purchased at a cost of $22,800 each.
These new vehicles replaced six of the original cars, which were sold for $11,400 each. None of
the new cars were zero-emission.

In the 2021 fiscal period, 18 additional compact cars were purchased at a cost of $24,300 each.
Also, in 2021 the remaining 14 compact cars purchased in 2019 were sold. As all the cars had
high mileage, the total proceeds from this sale are only $137,200, an average of $9,800 each
[$137,200/14] which is far below their capital cost.

In talking to their drivers, the Haddad brothers were told that delivering high quality Lebanese
food was a great way to meet people, make important business contacts and further promote
the business. As a result, the brothers decided to take over some of the deliveries themselves.
In 2021 the partnership purchased two luxury convertibles. One cost $135,000 and was diesel
powered and the second cost $160,000 and was a zero-emission vehicle (ZEV). The two
automobiles were used exclusively for making deliveries.

Early in 2022 larger competitors moved into the area causing the brothers to reconsider their
business strategy. After careful consideration the brothers decided to terminate the business.
The last day of the fiscal period was September 30, 2022. The 24 remaining compact cars were
sold for $8,300 each. The diesel-powered luxury convertible was sold for $85,000 and the zero-
emission luxury convertible was sold for $100,000. None of the vehicles were sold to non-arm’s-
length persons.

Required: For each of the 2019 to 2022 fiscal periods, calculate the maximum CCA. In addition,
determine the amount of any capital gain, recapture, or terminal loss that arises on any of the
transactions that occurred during these fiscal periods. Ignore GST/HST&PST considerations.
Assume that all the properties would have met the conditions to qualify for the AccII.

SSP 5–4 CCA Calculations over 3 Years

All Night Service Ltd. was incorporated on April 1, 2020, to provide computer services 24 hours
per day, 7 days per week. At the time of incorporation, the company chose December 31 as its
taxation year end for both income tax and accounting purposes.

On April 1, 2020, the company purchased a new building to be used as an office and
communications centre at a cost of $650,000. This total cost is allocated $580,000 to the
building and $70,000 to the land. The building is being used 100% for non-residential purposes
and the company has filed a timely election to have it included in a separate Class 1. Also on
this date, the company purchased six cars to be used by the service technicians at a cost of
$25,000 per vehicle. None of the cars are zero-emission.

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 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

On May 1, 2020, the company purchased a variety of computer repair and maintenance
equipment at a cost of $48,000. The company owns no computers as it leases all of its
computer hardware and software.

In 2021, the company trades in three of its old cars for three new minivans. The list price of the
new minivans is $24,000 per vehicle, and the company receives a trade-in allowance toward
this list price of $14,000 per old vehicle. None of the new cars are zero-emission vehicles.

On September 20, 2022, a zero-emission convertible is purchased at a cost of $98,000 for use
by the president of the company. In addition, two unusual events occur during 2022. They are
as follows:

• Equipment that had a value of $12,000 was stolen by one of the service technicians and
is not expected to be recovered. The company insurance policy does not cover theft by
employees.
• In December of 2022 one of the service technicians offers to purchase one of the
original six cars for $27,000. The company accepts the offer. The transaction is finalized
in January 2023.

Required:

A. Determine the maximum CCA that can be claimed for each of the years 2020 through
2022. In your calculations, include the January 1, 2021, January 1, 2022, and January 1,
2023, UCC balances. Ignore GST/HST & PST considerations. Assume that all
purchases meet the conditions for the AccII.

B. Explain the income tax consequences of the two unusual events that occurred in 2022.

SSP 5–5 Purchase and Sale of Goodwill

Traxit is a Canadian public company with a calendar-based taxation year that ends December
31. It is the policy of Traxit Ltd. to claim maximum CCA for all classes each year. On January 1,
2022, Traxit had a nil balance in Class 14.1.

What follows are two independent cases involving the purchase and sale of goodwill. In each
case assume that Traxit has no other Class 14.1 transactions in 2022 or 2023.

Case One In 2022, Traxit purchases two businesses, paying $56,000 for goodwill as
part of the first business and $124,000 for goodwill as part of the second business. Both
businesses are integrated into Traxits’ single business

In 2023, Traxit sells a segment of its business, which includes a sale of goodwill for
$97,000.

Case Two In 2022, Traxit acquires two businesses, paying $34,000 for goodwill as part
of the first business and $47,000 for goodwill as part of the second business. Both
businesses are integrated into Traxits’ single business.

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 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

In 2023, Traxit sells a segment of its business, which includes a sale of goodwill for
$85,000.

Required: Determine the income tax consequences for the years 2022 and 2023 in each of
these two independent cases. Your answer should include the January 1, 2024, class 14.1 UCC
balance. Assume that all of the requirements to qualify for the AccII have been met.

SSP 5–6 CCA Calculation

The following information relates to Bartel Ltd. for its 2022 taxation year ending December 31:

1. The company had UCC balances on January 1, 2022, for its depreciable property as
follows:

Class 1 (All buildings purchased in 2006) $590,000

Class 8 570,000
Class 10 61,000

2. In 2022, the company purchased office furniture for $14,000.

3. In 2022, the company purchased a truck from its majority controlling shareholder for its
FMV of $22,000. The shareholder had purchased the truck new four years earlier for
$34,000. The truck was the only class 10 property for the shareholder, and had a UCC
balance of $26,000 at the time of the sale to Bartel Ltd.

4. In 2022, one of the company’s buildings was sold for $440,000, of which $150,000
represented the value of the land on which the building was situated with the remaining
$290,000 attributed to the building. The capital cost of the building was $475,000, of
which $175,000 represented the value of the land at the time of the acquisition with the
remaining $300,000 attributed to the building.

The building was replaced in 2022 with a new building that cost $625,000, of which
$125,000 represented the value of the land and the remaining $500,000 the value of the
building. 100% of the floor space of the building is used for business purposes. The
company is not in the business of manufacturing and processing. The company filed a
timely election to include the new building in a separate Class 1.

5. Bartel Ltd. has always claimed the maximum CCA in each year.

Required: Calculate the maximum CCA that Bartel Ltd. can claim for 2022 for each CCA class.
Also calculate the income tax impact to the majority shareholder for the sale of the truck to
Bartel Ltd.

SSP 5–7 CCA Calculations

The taxation year of Atlantic Manufacturing Company, a Canadian public company, ends on
December 31. On January 1, 2022, the UCC balances for the various classes of depreciable
property owned by the company are as follows:

Class 1 - Building (Note 1) $625,000

Class 8 - Office Furniture and Equipment 155,000

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 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

Class 10 - Vehicles 118,000

Class 13 - Leasehold Improvements 61,750
Class 14.1 – Intangible Property Nil
Class 53 - Manufacturing Equipment 217,000

Note 1 The Class 1 building was acquired, used, in 2010.

During the year ending December 31, 2022, the following purchases of depreciable property
were made:

Class 8 - Office Furniture and Equipment $ 27,000

Class 10 - Vehicles (Note 2) 33,000
Class 12 - Tools (Note 3) 34,000
Class 13 - Leasehold Improvements 45,000
Class 50 - Computer Hardware 28,000

Note 2 The purchased vehicle was a delivery truck.

Note 3 None of the tools that were acquired during the year cost more than $500.

During this same period, the following dispositions occurred:

Class 8 - Used office furniture and equipment was sold for $35,000. The capital cost of
the property was $22,000.

Class 10 - A delivery truck with a capital cost of $23,000 was sold for $8,500.

Class 53 - Since the manufacturing operations will be done by subcontractors in the

future, all of the manufacturing equipment was sold for $188,000. Its capital cost was
$752,000.

Other Information:
1. The company leases a building for $27,000 per year that houses a portion of its
manufacturing operations. The lease was negotiated on January 1, 2019 and has an
original lease term of eight years. There are two renewal options on the lease, each for
four years. The company made $78,000 of leasehold improvements in 2019 immediately
after signing the lease. No further leasehold improvements were made until the current
year.

2. On February 24, 2022, one of the company’s cars was totally destroyed in an accident.
At the time of the accident, the FMV of the car was $12,300. The proceeds from the
company’s insurance policy were only $8,000. The capital cost of the car was $17,000.

3. In March 2022, the company granted a manufacturing licence for one of its products to a
company in southern Ontario. This licensee paid $87,000 for the right to manufacture
this product for an unlimited period of time.

4. It is the policy of the company to claim maximum CCA in all years.

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 Self-Study Problems, Byrd & Chen’s Canadian Tax Principles 2022/23 Edition

Required: Calculate the maximum 2022 CCA that can be claimed on each class of property,
the January 1, 2023, UCC balance for each class, and any other 2022 income tax
consequences from the information provided in the problem. Assume that none of the
depreciable property purchases involved non-arm’s-length persons nor were they acquired on a
rollover basis. In each case the company did not previously own any of the property acquired.

SSP 5–8 CCA and Tax Planning

On January 1, 2022, Kars Ltd. has the following UCC balances:

Class 8 $163,000
Class 10 112,000
Class 12 42,000
Class 13 180,000
Class 14.1 132,330

For the 2022 taxation year ending December 31, Kars Ltd. has determined that its net income,
before any deduction for CCA, amounts to $43,000. As the company does not have any taxable
income deductions, taxable income, before any deduction for CCA, would also be $43,000.

Other information related to the company’s depreciable property is as follows:

1. All the Class 12 property was purchased in 2021.

2. The leasehold improvements were made in September 2020 at a capital cost of

$240,000.

3. In 2021, the capital cost of additions to Class 10 was $52,000, while the proceeds from
dispositions in this class totaled $29,000. In no case did the POD exceed the capital cost
of the properties sold, and there was still property in the class as of December 31, 2022.

4. There were no 2022 additions or dispositions to classes 8, 12, 13, or 14.1.

5. The company has always deducted the maximum amount of CCA.`

Required:

A. Calculate the maximum CCA claim by Kars Ltd. for the 2022 taxation year.

B. As Kars’ tax advisor, indicate how much CCA you would advise the company to claim for
the 2022 taxation year and the specific classes from which it should be claimed. Provide
a brief explanation of the reason for your recommendation. In providing this advice,
ignore the possibility that losses can be carried either back or forward. In other words the
goal is simply to reduce taxable income, and therefore taxes payable, to nil for 2022.

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