Question

Acme Auto Parts Ltd. has gained approval for an eligible scientific research and experimental development on Cape Breton Island and is intending to invest $1.7 million. Investment tax credits available in 2014 include: Qualified Property, Scientific Research & Experimental Development Expenditures: CCPC (Canadian-controlled private corporation) 35% Other corporations and for expenditures above $500,000 15 Qualified property in selected areas and certain activities 10 Licensed child care spaces (maximums) 25 Apprenticeship job creation (maximums) 10 a. Assuming the tax rules governing ITCs and CCA, compute the investment tax credit available to Acme. (Enter your answers in whole dollars, not millions.) ITC $ 85000 b. What will be the original capital cost base for CCA purposes? (Enter your answers in whole dollars, not millions.) Original cost base $ 170000 c. The asset is part of Class 8 (20 percent) CCA pool. Compute the present value of the ITC and CCA combined (Acme uses 10 percent as its discount rate). Acme's tax rate is 22 percent. (Do not round intermediate calculations. Enter your answers in whole dollars, not millions. Round the final answer to the nearest whole dollar.) Present value of tax

Answer 1

a.

The investment qualifies for a 35% ITC.

$1,700,000 × .35 = $595,000

b.

The original cost base is:

$1,700,000 – $595,000 = $1,105,000

c.

The effects of ITC and CCA are realized at year-end. Therefore:

PV (ITC) = ITC × PVIF (n = 1, i = 10%)

= $595,000 × PVIF (n = 1, i = 10%)

= $540,909

dT PV(CCA)=[C, -Ser] с G 1+.5r 1+r r+d .20 x.22 1+.5x.10 = [$1,105,000 .10+.20 1+.10 = $154,700

Total combined present value of tax benefits is:

= $540,909 + $154,700 = $695,609