Question

The plant expansion cost was 4.5 million and it qualifies for capital cost allowance (therefore allowing 10% CCA rate). The building was put in use Jul 01,2017. It had a useful life of 30 years and recorded depreciation for 75000. No deferred taxes have been recorded. Research shows that a typical facility of this nature has a 20-year useful life. Provide alternatives regarding this and recommend the best solution

Plant Expansion The plant expansion involved the building of a new 9.200 square metre (100,000 square foot) facility. The total cost of the building was $4.5 million. The building qualifies as a class 1 asset for capital cost allowance (CCA) purposes with the enhanced deduction (therefore allowing it a 10% CCA rate). The building was put in use July 1, 2017. Danica determined that the new building had a useful life of 30 years. Danica re- corded depreciation in the amount of $75,000. You note that no deferred taxes have been recorded. Research showed that a typical facility of this nature generally has a 20-year useful life. Financing

if it needs to depreciated on 30 year or 20 year life?

Answer 1

Depreciation will be over 30 years if there is reasonable reason for Danica to believe that useful life is 30 years. Useful life should be calculated based on the wear and tear on the building while under use as intended. Thus if the useful life for the expected use of the building is estimated to be 30 years, the depreciation can be over 30 years.  

Only where the basis of determining useful life of the building is not reasonably ascertainable, the company should look at the useful life of similar facility in the market. The capital cost allowance can be reduced from the expansion cost to arrive at the amount subject to depreciation.