If you own capital property for your business, the Canada Revenue Agency considers it depreciable property. If you dispose of this property — whether it is computer hardware or a commercial building — at a loss, you may have a terminal loss. Unlike a capital loss, you can claim this loss against any type of income.
The Disposition of Capital Property
When you sell commercial property, you have to report its disposition to the CRA. Then, you have to determine whether you have a gain or a loss.
Rather than simply looking at the proceeds of disposition and the other figures associated with the asset, you need to consider everything in its class.
Capital Cost Allowance Classes
The CRA sorts all capital property into classes, with each class having a different CCA rate. This rate determines the portion of the asset you may write off each year following its purchase. The remaining balance becomes part of your unclaimed capital costs (UCC), which roll into future years.
Unclaimed Capital Costs
When completing your statement of business activities, you must take into account any additions you have made to a CCA class and any dispositions. Essentially, you use the amount of unclaimed capital costs. Then, you add in expenses you have incurred in that class and subtract money you have earned from disposing of assets in that class.
If you still have property in the class and this number is positive, it becomes your current unclaimed capital cost. You can use this amount to calculate your CCA for the year. However, if you have no property left in the class and this number is positive, you have a terminal loss.
For example, if you have $100,000 in unclaimed capital costs in class 1, and you add nothing to the class and sell an asset in the class for $10,000, you have a remaining UCC of $90,000. This number represents the UCC plus the additions and minus the proceeds of disposition,
If you still own property in this class, use this amount to calculate the amount of CCA you can claim for the year.
However, if you no longer own property in the class, you have a terminal loss of $90,000. You may deduct this amount from your income, regardless of its source.
In contrast, if you suffered the same type of loss for a building that was not related to your business, it would be a capital loss. In this situation, you could only claim this loss against other capital losses.
Arm’s Length Transactions and Personal-Use Property
It’s important to note that you cannot always use the selling price as your proceeds of disposition to make the above calculations. For example, if you sold a commercial building for $10,000 to a relative or another person who is not at arm’s length to you, you cannot use the selling price. Instead, use the building’s fair market value as the proceeds of disposition.
Similarly, if you have a commercial building and you convert it to a personal-use property, you must use its FMV on the day of the conversion as the proceeds of disposition.