CCA for individual projects Example: To start a second branch, a bakery would take a lease that costs $10,000 per year, and is renewable every 4 years. They will install $13000 worth of equipment. After 2 years they will spend $6000 on capital improvements and install an oven for $3000. The salvage value of all the equipment combined, after 8 years would be $2000. What CCA amounts need to be included in this project evaluation on a span of 8 years?
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Equipment 13,000 Year 0
Income Tax
Oven 3000 Year 2
Class 8 (CCA = 20%) S. El-Omari
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Equipment 13,000 Year 0
Oven 3000 Year 2
Capital improvement 6000 Year 2
Lease 10,000 Every year
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Oven 3000 Year 2
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Adjustment for Assets Example: In Jan. 1995 a company purchased a numerical control machine for $60,000 with a life expectancy of 10 years and zero salvage value. For book depreciation the machine was being depreciated using SL method for $6000 per year. For tax purpose the machine was class 43 property (CCA rate=30%). In Jan. 1998 the machine was overhauled at a cost of $15,000, which extended its life expectancy by 5 years. a) Calculate the book value and depreciation for year 2000. b) Calculate the CCA and UCC for the year 2000. 95 98 0 1 2 3 4
Leasehold interest class 13 (SL)
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Capital improvement 6000 Year 2
End-of-year Equipment CCA Oven CCA 1 1300 50% 2 2340 3 1872 300 4 1498 540 5 1198 432 6 958 346 7 767 276 8 614 221 Total 10,547 2,115
Class 8 (CCA = 20%) Leasehold interest class 13 For capital improvement on lease hold CCA is the less of; 1. One fifth of the capital cost = 6000 / 5 = 1200 2. The capital cost divided by by the number of 12-months periods from the start of the improvement to the end of the lease plus first succeeding renewal = 6000/6 = 1000
Lease 10,000 Every year
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Equipment 13,000 Year 0
CCA for individual projects
Capital improvement 6000 Year 2
Leasehold
500 1000 1000 1000 1000 1000 5500
Lease 10,000 Every year Total CCA 1300 2340 2672 3038 2630 2304 2043 1835 18,162
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P= 60,000 S=0 N=10 overhaul = 15,000 C= 6000 Life 15 year Book depreciation B3 (before improvement) =60,000–3(6000)=42,000 B3 (after improvement) = 42,000 +15,000 = 57,000 D6 = 57,000 / 12 = 4,750 B6 = 57,000 –3(4750) = 42,750 S. El-Omari
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year 1995 1996 1998 1998 1999 2000
Original machine Overhaul CCA (d=30%) UCC(year end) CCA(d=30%) UCC 9000 51000 15300 35700 50% 10710 24990 7497 17493 2250 12750 5248 12245 3825 8925 3674 8571 2678 6247
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The tax rate applicable to the next dollar of taxable income
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A corporation has an existing level of annual taxable income of $70,000 which is taxable at an average rate of 35%. A new investment is under consideration which will increase annual taxable income by $25,000. The first $10,000 is taxable at 40% and the next $15,000 is taxable at 45%. Taxable income 70,000 + 25,000 = $95,000 Income taxes: $70,000 * 35% = 24,500 =$35,250 $10,000 * 40% = 4,000 =$10,750 $15,000 * 45% = 6,750 Average tax rate : 35,250 / 95,000 = 37.1% Incremental Tax Rate : 10,750 / 25,000 = 43.0% Marginal Tax Rate: 40% & 45% 9
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Cost of goods sold Capital cost allowance (CCA) Operating expenses Interest
• Taxable Income • Income Taxes • Net Income S. El-Omari
A company buys a machine for $40,000 and uses it for 5 years, after which it’s scrapped. This equipment falls into CCA class 43 with a rate of 30%. If the followings are estimated expenses and revenues and the company pays a tax rate of 40%, what is the net project income in the first year? Gross income (revenues) $52,000 Expenses $20,000 $ 6,000 = 30% (40,000) / 2 $ 5,000 $31,000
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Cash flow = net income + non-cash expenses (CCA) Cash flow = 12,600 + 6000 = 18,600 net Income Gross income (revenues) $52,000 Expenses Cost of goods sold CCA Operating expenses Interest
Taxable income Income Taxes (40%) Net Income Net Cash Flow
Taxable income = 52,000 – 31,000 = $21,000 Income Tax (40%) = 21,000 (40%) = $8,400 Net Income = 21,000 – 8,400 = $12,600 ENGR 301 Lecture 21
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Net Income vs. Cash Flow
Example: Net Income
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Taxable Income = Gross Income – Expenses Income Taxes = Tax Rate x Taxable Income Net Income = Taxable Income – Income Taxes • Gross income = revenues • Expenses
Income Taxes
Cost of goods sold CCA Operating expenses Interest Total expenses
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Taxable Income & Income Taxes
Example: income tax rates
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Total income taxes = average tax rate x total taxable income
• Marginal Tax Rate
The tax rate applicable to an increment of taxable income over and above the basic tax rate.
Income Taxes
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Definitions • Income tax = Tax rate x Taxable income • Average Effective Tax Rate
• Incremental Tax Rate
CCA at 2000 = 3674 + 2678 = $6352 UCC at 2000 = 8571 + 6247 = $14,818 S. El-Omari
Income Taxes
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$20,000 $ 6,000 $ 5,000 -
$21,000 $ 8,400 $12,600
Cash flow $52,000 - 20,000 - 5,000
- 8,400 $18,600
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For corporations With taxable Capital < 10 millions applied On the first $200,000
Corporate Income Taxes Corporate income tax = gross income – allowable deductions Combined corporate tax rate = federal rate + provincial rate. Federal and provincial tax rate determined by – – – – –
Manufacturing and Processing Profits Deductions For corporations with 10% of revenues From manufacturing And processing goods
Corporate size (as measured by taxable income) . Ownership (private vs. public, Canadian vs. non-Canadian). Type of business (manufacturing vs. no-manufacturing). Types of income (operating vs. investment). Source of income (inside vs. outside Canada).
The following table is for operating income for Canadian controlled corporations with all such income earned in Canada.
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Increased to 9.15 Effective from July 1999
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Corporate Income Taxes
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Corporate Income Taxes
Example: A private company in Nova Scotia leased a warehouse for $20,000/year and installed $100,000 worth of equipment. The company had a gross income of $1,250,000 for the year with total expenses of $840,000. With a CCA rate of 30%, compute how much the company pays for taxes this year? Gross income (revenues) $1,250,000 Expenses $ 840,000 CCA $ 15,000 Lease $ 20,000 Taxable Income $ 375,000
Federal Taxable Income $ 375,000 The first 200,000 @ 13.12% $ 26,240 The remaining $175,000 @ 29.12% $ 50,960 Total federal tax payable $ 77,200 Provincial Taxable Income $ 375,000 The first 200,000 @ 5% $ 10,000 The remaining $175,000 @ 16% $ 28,000 Total federal tax payable $ 38,000 Total combined corporate income tax $ 115,200
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