Real-Life Communication
A self-employed writer, Henry Wordsmith, has just purchased a brand
new computer for $2,500. The tax laws will let you claim deductions for expenses.
In other words, if you have a phone bill, you can subtract that expense from
your income and pay less on your taxes.
Yet a computer, like all property,
is an asset. It's something you can keep and make money from by selling it
later. So unlike your phone bill, you can't deduct the total cost of the computer
from your income.
Wordsmith knows that his computer will probably be
worthless in a couple years. He doesn't think this is very fair. Why doesn't
he get a deduction for the cost of the computer?
Lucky for him, the
government allows people to claim depreciation, or the decrease in the value
of something like the new computer, on their income tax as a deduction.
So
he comes to you, his trusty accountant, to help him out with his taxes.
You've
just received the new Guide to Business and Professional Income Tax Returns.
So you look up the appropriate section.
Read the following excerpt
from the guide. Then explain to Wordsmith what the tax people are planning
to do about equipment that becomes obsolete before being fully depreciated.
Guide
to Business and Professional Income Tax
For income tax purposes,
depreciation is called "capital cost allowance (CCA)." You cannot deduct the
cost of a property, such as a building, equipment or a new motor vehicle.
However, since these types of properties can wear out or become obsolete over
time, you can deduct a portion of the property's cost. The portion of the
cost you can claim is called "depreciation."
Certain types of equipment,
especially computer equipment and some office communication and electronic
equipment, can become obsolete before being fully depreciated for income tax
purposes. This includes photocopiers and fax machines. The government proposes
that the Income Tax Regulations be amended to allow you to place such property
in a separate class for CCA purposes. Each eligible property must cost $1,000
or more and be acquired after April 26, 1993.
This new class doesn't
change the specified rate but allows you to claim a separate CCA deduction
for property in this class. The separate class ensures that, on the disposition
of all property in that class, any remaining undepreciated capital cost of
the equipment is fully deductible as a terminal loss. A special rule is established
requiring the UCC (see below) created under this new separate class to be
transferred into the UCC of the general class in which it would otherwise
belong after five years.
Undepreciated Capital Cost
The
balance of the capital cost left for further CCA at any given time. The amount
of CCA you claim each year will reduce the UCC of the property.