48 What is a Terminal Loss? What is Recapture? How are they recorded in net income for tax purposes?
Gurtaj Pannu
Terminal loss
According to TaxTips the author states that, “When a depreciable fixed asset is sold, its capital cost allowance (CCA) class is reduced by deducting the lower of its original cost, or its proceeds of sale. If all the assets in a class have been sold, but at the end of the fiscal year there is still a balance of undepreciated capital cost (UCC) remaining in the class, this balance can be fully written off against business or property income as a “terminal loss”.”
So, if you have disposed of all the assets in a specific CCA class but there is still a remaining UCC balance in the class, effectively it means you didn’t claim enough CCA in previous years. The ITA addresses this by allowing you to claim a Terminal Loss on this remaining balance in the current year. The Terminal Loss is deducted from your business or property income and reduces the remaining UCC balance in the class to $Nil.
Recapture
According to TaxTips, the author states that, “When a depreciable fixed asset is sold, its capital cost allowance (CCA) class is reduced by deducting the lower of its original cost, or its proceeds of sale. If, at the end of a fiscal year, the balance of the class is negative, a gain has occurred. This gain is referred to as a “recapture” of CCA and must be included in business or property income for the year.”
If we sell an asset and the balance in the class is negative at the end of the fiscal year, we have created Recapture. This means we have claimed too much CCA in the past. The ITA addresses this by adding back the Recapture amount to the business or property income in the year.
|
|
Terminal Loss |
Recapture |
|
UCC, beginning of year |
$6,000 |
$6,000 |
|
Sold asset for… |
$4,000 |
$9,000 |
|
Terminal Loss |
$2,000 ($6,000 – $4,000) |
Not applicable |
| Recapture |
Not applicable |
$3,000($6,000-$9,000) |
| Note: Terminal losses are only recorded when there are no other assets in the CCA class. | ||
Remember, Terminal Losses are subtracted from your business or property income, and Recapture is added to your business or property income.
Now let’s look at how the above example would impact our “GAAP to Tax” business reconciliation. Assume the individual had GAAP net income of $10,000 and CCA of $500 (from assets in a different CCA class than in the example above).
Business Income Statement
|
ITA Citation
|
Notes |
||
|
GAAP Net Income
|
$10,000 |
ITA 9(1) |
Taxpayer’s Income for the Year
|
|
Terminal Loss
|
($2,000) |
ITA 20(16)
|
Deduction from Business Income
|
|
CCA
|
($500) |
ITA 20(1)(a) |
Deduction from Business Income
|
|
Recapture
|
$3,000 |
ITA 13(1) |
Inclusion in Business Income
|
|
Business Income for Tax Purposes
|
$10,500 |
Amount will be placed in Section 3a (Business Income)
|
As the Business Income for Tax Purposes is positive It will be placed in Section 3a
|
(Example by: Clarissa D’Souza)
Interactive content (Author: Swei Liang, July 2019)
Interactive content (Author: Gurtaj Pannu, March 2019)
References and Resources:
- Article- “Terminal Loss” (Author: TaxTips)
- Article- “Recapture” (Author: TaxTips)
- Article- “Example for the calculation of recapture of CCA and terminal loss” (Author: Government of Canada)
- Competency map: 6.3.2
March 2019
