Kinnetics Inc. purchased Class 8 (20% CCA Rate) equipment for
13,000. Kinnetics is subject to 40% taxation. Ending UCC in 2014 is:
The Correct Answer and Explanation is:
To calculate the ending UCC (Undepreciated Capital Cost) in 2014 for Kinnetics Inc., we must apply the Capital Cost Allowance (CCA) rules using the declining balance method and the half-year rule.
Step 1: Identify key values
- Asset class: Class 8
- CCA rate: 20%
- Purchase price: $13,000
- Half-year rule: Only half of the asset’s value is depreciable in the year of acquisition
- Tax rate: 40% (used only for tax savings, not in UCC calculation)
Step 2: Apply the half-year rule
In the year of acquisition (2014), only 50% of the asset’s cost is eligible for CCA.
Eligible CCA base for 2014 = 50% × $13,000 = $6,500
Step 3: Calculate CCA for 2014
CCA = 20% × $6,500 = $1,300
Step 4: Calculate ending UCC for 2014
Ending UCC = Original cost − CCA claimed
Ending UCC = $13,000 − $1,300 = $11,700
Final Answer:
Ending UCC in 2014 = $11,700
Explanation
Undepreciated Capital Cost (UCC) is the value of a depreciable asset that remains after accounting for Capital Cost Allowance (CCA). In Canada, businesses use CCA to deduct the cost of certain assets over time for tax purposes. Each type of asset falls into a class with a specific depreciation rate. Class 8 includes equipment and machinery not classified elsewhere, and it uses a 20 percent depreciation rate.
When an asset is purchased, the half-year rule applies in the first year. This rule means that only half of the asset’s cost is used when calculating CCA in the year the asset was acquired. The purpose is to fairly allocate depreciation when assets are not in use for a full year.
In this case, Kinnetics Inc. purchased Class 8 equipment for $13,000. Because of the half-year rule, only half of this cost — $6,500 — is eligible for depreciation in 2014. Applying the 20 percent CCA rate to $6,500 gives a depreciation (CCA) of $1,300.
To find the ending UCC at the end of 2014, subtract the CCA of $1,300 from the original cost of $13,000. This results in an ending UCC of $11,700, which is the amount carried forward to the next tax year for further depreciation. The 40 percent tax rate affects how much tax Kinnetics saves due to this deduction but does not change the UCC itself.
