Recapture is the amount by which the previously claimed Capital Cost Allowance (CCA) on an asset is added back to income when the asset is sold for more than its undepreciated capital cost (UCC) but less than its original cost.
The purpose of recapture is to ensure that any tax benefits previously received from depreciating an asset are corrected if the asset is disposed of for a higher amount than its depreciated value. Essentially, it prevents a tax advantage from being permanently enjoyed if the asset is sold for more than its depreciated value.
Calculation of Recapture
When an asset is sold, the recapture amount is calculated as follows:
Tax Implications
The recapture amount must be included in the business's income for the year in which the asset is sold. This increases the taxable income for that year, which could result in a higher tax liability.
Example 1: Recapture on Sale of Equipment
David purchased equipment for $10,000. Over several years, the business claims a total CCA of $6,000 on the equipment. The remaining UCC of the equipment is $4,000 ($10,000 - $6,000).
Sale of the Asset:
Recapture Calculation
Tax Implications
David must include the $1,000 recapture amount in its income for the year of the sale. This increases his taxable income by $1,000.
Capital Loss
David has a capital loss of $5,000. However, a loss from the sale of depreciable property (such as buildings or equipment) is not considered a capital loss. Capital losses typically apply to investments like stocks or non-depreciable property, not depreciable assets.
In summary, recapture adjusts the tax benefits received from asset depreciation when the asset is sold for more than its depreciated value, ensuring that previously claimed deductions are properly accounted for in the business's income.
For more information, visit the Canada Revenue Agency: Canada Revenue Agency
Posted on 18 September 2024