Question

A proprietor purchases an income-producing asset that has a class life of five years. It is the only asset the company owns. The proprietor sells the asset after four years. If the asset's market value has declined by more than the CCA taken, ________ for the year.

A. there will be a capital loss
B. the UCC balance will be negative
C. there will be a capital gain
D. there will be a terminal loss

Answer 1

The correct answer is D. there will be a terminal loss. This occurs when an asset is sold for less than its UCC after accounting for CCA. Terminal losses can be used to reduce taxable income.

Step-by-step explanation:

When a proprietor sells an asset for less than the undepreciated capital cost (UCC) after accounting for capital cost allowance (CCA), the difference is called a terminal loss. CCA is the tax equivalent of depreciation in many tax systems, including Canada. If the asset's market value has dropped more than the accumulated CCA, it implies that the UCC after the CCA deductions is still higher than the proceeds of disposition (sale price). As a result, there will be a terminal loss, which the company can use to reduce taxable income.

Capital losses, on the other hand, are incurred when a capital property is sold for less than its original cost, not its UCC. Hence, since the sale price of the asset is less than its UCC after CCA deductions, the correct answer is D. there will be a terminal loss.