Terminal Loss and its Tax Implications

A terminal loss occurs when a business disposes of the last asset in a particular asset class and the remaining undepreciated capital cost (UCC) of that class is not fully offset by any proceeds from the sale of the asset. Essentially, it's the amount by which the UCC of an asset class exceeds the proceeds of disposition when the last asset in that class is sold or otherwise disposed of. This loss can be deducted from the business's income for tax purposes.

Example 1:

Let’s say a business has a Class 10 asset class, which includes vehicles and equipment. The business has disposed of all its assets in this class, leaving the asset class with a remaining undepreciated capital cost (UCC) of $5,000 and $2,000 in proceeds from the sale of these assets.

Remaining UCC of Class 10: $5,000

Proceeds from Disposal: $2,000

Cost of the property: $8,000

Terminal Loss Calculation

To calculate the terminal loss, subtract the proceeds from the remaining UCC:

Terminal Loss: Remaining UCC - Proceeds from Disposal

Terminal Loss: $5,000 - $2,000 = $3,000

Tax Treatment

The terminal loss of $3,000 can be deducted from the business's income for the tax year in which the last asset was disposed of. This deduction reduces the taxable income for that year.

Result

In this case, the business can claim a CCA of $3,000 (terminal loss) on its tax return, which will reduce its taxable income by that amount.

For more information, visit the Canada Revenue Agency: Canada Revenue Agency