Video instructions and help with filling out and completing Can Form 4797 Delete

Instructions and Help about Can Form 4797 Delete

Okay this is Mike and today we're going to look at capital gains on depreciable assets so today we're going to use the example of an individual who owns a building and is renting it out to tenants so the information that we have is that he is not incorporated so all the rental income and the capital cost allowance which is the Canada Revenue Agency term for depreciation will be declared on the individuals personal income tax return so this individual purchased the building for four hundred and fifty two thousand earned rental income for three years of twenty thousand per year and disposed of the building for five hundred and seventeen thousand at the end of year three so we have three challenges one is to calculate the adjusted cost base in other words what did the building cost us calculate the capital gain at the sale of the building and calculate any capital cost allowance recovery so we'll get to each one of these in a step-by-step manner so the first steps we're going to look at is first are calculating our adjusted cost base otherwise known as ACB we're going to calculate the capital cost allowance otherwise known as depreciation we're going to calculate the capital gain when the property was disposed sold and step four will be to calculate the recovery of the CCA and see how that's included in your taxable income here we have a table showing the purchase price of the building some calculations for CCA and some calculations relating to the disposal and the recovery of CCA so let's take the first piece what is the adjusted cost base of this property we see here that this individual paid four hundred and thirty thousand for the building twenty two thousand of transaction costs for a total of 452 now we need to know because we're going to be calculating some depreciation we need to know what proportion of that is related to the building and what is related to the land that it sits on because we don't depreciate land and don't take CCA on land so what well what we've done here is we've got a calculation on the original purchase price thing price of the building which shows that we are calculating a pro-rata of 300,000 on 434 the value of the building so that will give us 70% of the building price is related to of the total prices related to the building which gives us three hundred and fifteen thousand dollars you see here we've just repeated to 70 percent times the total price that we pay for it to calculate the CCA this is the revenue canada term or the connect canada revenue agency term for depreciation and you'll see in this table we have some additions during the year the three hundred and fifteen thousand dollars for the building we have what we called UCC undepreciated capital costs to begin the year and we're showing our CCA rate now Revenue Canada CRA charges allows us to deduct CCA on very strict terms it's always declining balance it's always the half-year rule where you take 50% of the depreciation in the year of acquisition and it depends on the class of the asset so while building acquired after 1987 is class 1 which is carries a CCA rate of 4% so if we do the math we basically got our UCC undepreciated capital cost multiplied by our rate of 4% and we've taken fifteen percent fifty percent of that and that gives us $6,000 so like any declining balance method we go we carry that 309 forward to the next year and we've made no additions so we calculate four percent for a full year giving twelve percent in twelve thousand dollars and so on and so forth for the three years that we own the property so in total over three years we've actually booked thirty thousand dollars of CCA now that CCA was deducted from our income in each of those years reducing our tax owing and we'll see that in a few seconds next thing we want to know is what was the capital gain on disposal so that's a fairly easy calculation we know that we paid four hundred and fifty-two thousand dollars for this property and we've sold it for 550 less thirty three thousand dollars of fees presumably real estate agent fees etc for net proceeds of five seventeen so that five seventeen less the 452 adjusted cost base gives us our capital game which is taxed at 50 percent will include thirty two thousand dollars of capital gains in our income and that will be taxed at our marginal tax rate for many students calculating the CCA recovery is quite problematic but it's actually quite a simple concept once you grasp it so let's walk through what this individuals income tax return would look like if he had declared his rental income on his personal income tax return because in this case he's not incorporated when we're talking about a personal income tax return so in year one assuming he had employment elsewhere he would have let's say had $50,000 of employment income twenty thousand dollars of rental income from his tenants and he would have deducted six thousand three hundred dollars of CCA as per the table we just calculated that would give taxable income of sixty three thousand at a tax rate let's assume twenty six percent he would have hoped sixteen thousand five sixty just for Al raishin without the benefit of that CC a deduction he would have had the same 50,000 of employment income 20 thousand of rental income from his tenants giving a taxable income of 70,000 which would have given him a tax burden our tax owing of 18,000 so the CCA in effect is a deduction from business income and it has the impact of reducing your tax in the