How to enter recapture of Capital Cost Allowance

[Mike2611]

How and where do i enter recapture of Capital Cost Allowance in ufile?

[TheTaxSmith]

Hello Mike2611. In the area where you have the asset that you disposed of (within the CCA category of assets) make sure you have entered the opening balance of the UCC, the date of purchase, and the ACB. Once you have verified they are all entered move down and look for "Proceeds of disposition of an asset" and enter the amount you received upon sale or the disposal amount. Underneath complete the "ACB of the disposition" for the specific item disposed of. Then respond to the questions further down concerning "Calculate the capital gain and carry the result to schedule 3" and "Did you liquidate all assets in this class".

Once you have completed the data entry you should now see any recapture on the Income Statement (or perhaps a Terminal Loss) and a Capital Gain if there was any on Schedule 3.

 

[hetrees]

On 1/31/2021 at 5:09 PM, TheTaxSmith said:

Thanks TheTaxSmith! I got another questions: what should be included in "ACB of the depreciable capital property in this class" and what should be included in "ACB of the disposition"? Thanks a lot! 

 

[TheTaxSmith]

Hello hetrees. The ACB of any asset includes the actual purchase cost plus any costs associated with the purchase such as legal/notarial fees, transfer taxes, title insurance or surveys, etc.. After acquisition/purchase you will add future costs for additions, improvements/renovation, major changes, BUT not expenses such as normal repairs or general upkeep. In the case of non-depreciable property (land) you would take a portion of the acquisition costs if it included other assets such as buildings and separate the land ACB from the depreciable assets ACB. Improvements to the land could be initial landscaping such as drainage sloping, ditching, etc..

The ACB determined as above moves through time and is the same as the ACB upon disposition. However upon disposition you will need to record expenses for disposition, such as real estate commissions, legal/notary fees for loan quittances, etc., separately to determine any capital gains or losses.

The ACB is an amount that will usually be different from the UCC (Undepreciated Capital Cost), so don't confuse the two. The UCC is basically the ACB less any CCA (Capital Cost Allowance or commonly termed depreciation) previously claimed for income tax purposes. A common mistake in tax preparation has been using the UCC as the ACB in Schedule 3 and then claiming a capital gain higher than actual. The Capital Gain is the Proceeds less the ACB less the Expenses of disposition. The ACB less the UCC is Recapture and is all income, not a capital gain.

Here is a link you should access   https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-127-capital-gains/calculating-reporting-your-capital-gains-losses/adjusted-cost-base.html

 

[hetrees]

Thanks for your prompt reply! I kind of understand what you mean. Let's say here is the scenario: I bought a house in 2016, all the cost is $300,000.  The UCC at the very beginning is $240,000 (80% of all the cost). The building depreciated $40,000 form 2016 to 2020. So the UCC in 2020 is $200,000.  In 2020 I sold the house, the selling price is $500,000, and all the cost is $20,000. My calculation of capital gain is $500,000-$300,000 (all the cost when purchasing) - $20,000(expense when selling) = $180,000. The taxable capital gain is $90,000. The amount of recapture CCA is $40,000. 

I input these numbers into UFile,  shown in the figure below:

Here is the results:  the numbers in schedule 3 is right, but the recaptured CCA is wrong in T776. UFile thinks I claimed $100,000 CCA ($300,000-$200,000) over the years (shown below). I then set the "ACB of the depreciable capital property in this class" = 240,000, and "ACB of the disposition" = $300,000 since I presume the first one will be used to compute CCA recapture and the second one for calculating capital gain.  However, UFile does NOT make any changes.  Could you please help me figure out what I am wrong or if there is a bug in UFile? Thanks a lot and have a good day!

On 1/31/2021 at 5:09 PM, TheTaxSmith said:

Thanks TheTaxSmith! I got another questions: what should be included in "ACB of the depreciable capital property in this class" and what should be included in "ACB of the disposition"? Thanks a lot! 

 

[TheTaxSmith]

Hi hetrees. You have correctly proportioned the purchase cost (original ACB) to land plus building and you have correctly allocated the opening ACB building portion of $240,000 to the additions back in 2016. From there you have taken $40,000 in CCA. In your data entry for the building (and just the building) you should enter the actual ACB that you determined was the building portion back in 2016. Do not enter the total ACB ($300,000) at purchase as that includes a depreciable asset as well as a non-depreciable asset.

In the Line "ACB of the depreciable property in this class" you will need to enter the building ACB of $240,000. That will now provide you with $40,000 in Recapture of CCA which will show up on your business/rental statement as income.

[hetrees]

Thanks again! I completely agree with you that in the line "ACB of the depreciable property in this class" I need to enter $240,000. I did this, but UFile still uses the total ACB ($300,000) in the calculation of CCA recapture. Can you do a similar test on this when you have time to verify it. I think there is a bug for this. Thanks! 

[TheTaxSmith]

I should have mentioned that the data entry for the building disposition for "Proceeds" should be only the building portion of the disposition price. Lets say 80% of the $500,000, so enter $400,000. Then for "ACB of the disposition" enter $240,000. That will give you the gain for the building.

Now for the land portion you will need to scroll down the list in the CCA area for the income/rental statement and add a category for the land. Once that schedule is in place (if not already done) complete it for the land disposition portion and the land ACB portion, and ask to calculate the gain as you did in the building area.

Trust that helps.

[hetrees]

Now I understand the logic. All the numbers are in the right place. Really appreciate your help and have a good day!