Tax free Cashflow ? by Norair Yeretsian

You successfully negotiate a purchase of an income producing property for
$4,200,000  and determine by way of contractual agreement APS Form 500
attached schedule A with an appropriate clause included, negotiated at market,
at arm’s length and determine an allocation of  70/30 split for building and land.
[ 70% for Building + improvements and 30% for land : no depreciation ]

CCA Calculation : $ 4,200,000 purchase price plus cost of acquisition of $ 175,000.
Which totals $4,375,000 as acquisition price, this is the number we apply the
allocation : 70/30. And arrive at a UCC of  $ 3,062,500.
This is the value of the Undepreciated Capital Cost (UCC)  at the beginning of year 1.

Given that this property is a Class 1 asset with a marginal rate of 4 %
(CRA , Regulations to the Income Tax Act) and the half year rule applies,
let us calculate and develop a 5 year table of CCA Taken + UCC.

With appropriate End of Year  (EOY ) numbers for each year.
This income producing property is assumed to have a taxable income
before CCA application Taken of at least the amount of the CCA calculated
in each year. You can not create a loss using CCA.

UCC at Beginning of Year 1 : $ 3,062,500 .

CCA Taken             UCC

EOY 1 :                        61,250              3,001,250
( 2% taken )

EOY 2 :                   120,050                2,881,200
(4% taken)

EOY 3 :                    115,248                 2,765,952
(4% taken)

EOY 4 :                    110,638                 2,655,314

EOY 5 :                    106,213                  2,549,101

Recapture CCA : $ 513,399  potential

In the event you sell the property at the beginning of year 6 for at least the value
of the original UCC, you must first recapture all the CCA Taken over the years and
add it to your ordinary income for that year and be fully taxable on the total .

Without good tax planning and organizing your affairs appropriately this may
end up being a heavy burden on yourself, your estate or your corporation.

Seek the best tax accountant(s) before you enter into a sale agreements ( Buy / Sell )
to help you set up the arrangement correctly and discuss these tax matters with the accountant.
No one wants a surprise where Taxes are concerned.

nyeretsian@yahoo.com May 5, 2010