Principal Issues: 1) In a given scenario, which percentage of business use should be used to calculate the recapture of capital cost allowance: the percentage of business use in the year of acquisition of the passenger vehicle or the percentage of business use in the year of disposition? 2) If it is the percentage of business use in the year of disposition, does the CRA agree that this could lead to an inappropriate result as demonstrated in the given scenario?
Position: 11) Where recapture of capital cost allowance is required to be included in computing income for the year under subsection 13(1), such recapture of capital cost allowance is included in the proportion corresponding to the business use in the year of disposition. 2) The CRA accepts two methods for calculating CCA in the given situation. Therefore, a self-employed individual may use the method that is most appropriate to his or her situation.
Reasons: 1) In accordance with the method used to calculate CCA. 2) In certain situations, the calculation of CCA and recapture of CCA may produce a different result depending on the calculation method used.
APFF FEDERAL TAX ROUNDTABLE 10 OCTOBER 2024
2024 APFF CONFERENCE
11. Recapture of depreciation related to Class 10.1 property - self-employed worker
The CRA has a longstanding position regarding the calculation of capital cost allowance (“CCA”) when a self-employed individual uses a motor vehicle, which includes a passenger vehicle included in depreciation Class 10.1 in Schedule II of the Income Tax Regulations (footnote 1), for both business and personal purposes. Essentially, the CRA accepts in this case that the self-employed individual should determine the amount of CCA on the motor vehicle as if the use were entirely for business purposes, while deducting only the proportion of CCA corresponding to the business use.
Here is a hypothetical scenario using this method to calculate CCA on a passenger vehicle that has been designated for the immediate expensing incentive (which deliberately omits the effect of commodity taxes in the calculation):
In 2022, a self-employed individual acquired a passenger vehicle at a cost of $50,000. The maximum amount of $34,000 was then included in depreciation Class 10.1. The percentage of business use in 2022 was 40%, and the self-employed worker designated the property as designated immediate expensing property, entitling him to CCA of $13,600 for the year 2022.
In 2023, he sold the passenger vehicle for $38,000. From the beginning of the 2023 taxation year until the sale, he had used the passenger vehicle 60% for business purposes. Since the cost to the self-employed individual of the passenger vehicle, which had been designated as designated immediate expensing property within the meaning of subsection 1104(3.1) Reg., exceeds the amount set out in subsection 7307(1) Reg., paragraph 13(7)(i) provides that the deemed proceeds of disposition are: $38,000 x $34,000 / $50,000 = $25,840. This results in an equivalent amount of recapture of depreciation. However, taking into account the business use percentage use for the year 2023, this recapture must be multiplied by 60%. The self-employed worker will then have to include $15,504 in income as recapture of depreciation, an amount greater than the immediate expensing claim for 2022.
Questions to the CRA
a) Which percentage of business use should be used to calculate the recapture under this method: that for the year of acquisition of the passenger vehicle or that of the year of disposition?
b) If it is the percentage of business use in the year of disposition, does the CRA agree that this could lead to an inappropriate result as demonstrated in the case study?
CRA Response to Question 11 a)
Under the rules set out in section 13, a taxpayer who disposes of depreciable property, as that term is defined in subsection 13(21), may be required to include in computing income an amount as recapture of depreciation claimed in respect of such property.
Where a self-employed worker uses the method described above to calculate CCA in respect of a motor vehicle used for both business and personal purposes, the individual must determine the amount of CCA in respect of the motor vehicle as if it were used entirely for business purposes, while deducting annually only the proportion of CCA corresponding to the business use in the particular year.
Consequently, when recapture of depreciation must be included in computing the individual’s income for the year pursuant to subsection 13(1), such recapture of depreciation must be included in the proportion corresponding to the business use in the year of disposition. In the hypothetical scenario submitted, that proportion corresponds to 60%.
CRA Response to Question 11 b)
Although the CRA accepts the method previously described for calculating CCA in respect of a motor vehicle used by a self-employed individual for both business and personal purposes, it is important to note that, pursuant to paragraphs 13(7)(c) and 13(7)(d), the capital cost of the property must generally be apportioned on an annual basis between its use for the purpose of earning income and its use for other purposes. Thus, where the property is used for both business and personal purposes, CCA can only be claimed on the proportion of the capital cost related to the business use.
In certain situations, the calculation of CCA and recapture of depreciation may produce a different result depending on the calculation method used. Since the CRA accepts both methods, a self-employed worker can use the one that is most appropriate for the situation. However, the same method must be used for all taxation years.
Jean-François Benoit
October 10, 2024
2024-102892
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Income Tax Regulations, C.R.C., c. 945 ("Regulations").