Question

PLEASE SOLVE BY HAND

An industrial corporation bought a manufacturing facility 3 years ago for $5,000,000. Due to the strategic location of the facility, the company decided to sell the facility now for $6,500,000. Assume CCA rate is 15% (and Declining Balancemethod for tax depreciation by default) and an effective tax rate of 35%. What is the disposal tax effect of this asset?

Notes: you need to be specific in your answer and classify whether there is capital loss/gain and whether taxes are payable or a tax credit can be claimed. The half-year rule applies of course in this question by default.

Answer 1

Let's calculate the CCA depreciation for each of the three years:

Year of purchase: 1/2 of 15% of $5,000,000 = $375,000

Balance after year 1 = $5,000,000 - $375,000 = $4,625,000

Year 2: 15% of $4,625,000 = $693,750

Balance after year 2 = $4,625,000 - $693,750 = $3,931,250

Year 3: 15% of $3,931,250 = $589,687.50

Balance after year 3 (i.e., in current year) = $3,341,562.50

Since the asset has been sold for $6,500,000 this year, capital gains would be:

$6,500,000 - $3,341,562.50 = $3,158,437.50