In today's Canadian Taxes A to Z, T is for Terminal Loss. Twenty letters down, six to go. And yes, I'm aware there's only one day left!
For some reason, I've always liked the term Terminal Loss. Maybe because it conjures up travel images of train and bus terminals. Perhaps because of its finality. It's another of those "tax terms" that if you're not in the know, you'd never guess at what it means.
SELLING FOR LESS THAN UCC GENERATES A TERMINAL LOSS
When depreciable capital property is sold for a value lower than its undepreciated capital cost (UCC) at the end of a fiscal year, then it can general a terminal loss if there are no other assets left in the class. A terminal loss is fully deductible against other income.
Say you buy a Big Purple Machine, take some depreciation over a couple of years that reduces its UCC to $10,000, but then sell it for only $5,000. Perhaps because Big Purple Machines were an industry fad for a couple of years, but ultimately didn't make anyone any money. Thus the low resale value.
If nothing is left in the Big Purple Machine class, you can claim another $5,000 terminal loss deduction for the difference between the UCC and what you sold it for. Pretty good, eh?
BEWARE RECAPTURE INSTEAD OF TERMINAL LOSS
But watch out. Terminal Loss has an evil twin called Recapture. If you sell the Big Purple Machine for $11,000, but have already depreciated it to a $10,000 value, and nothing is left in the class, then you wind up with a $1,000 recapture that you've got to include in income!
The moral of the story is try to sell used business assets for amounts lower than the depreciation you've taken on them. You'll be able to deduct any loss you take, and won't wind up getting stuck with paying taxes on any sale profit.
Gordon S. Campbell has argued tax cases as high as the Supreme Court of Canada. He also litigates civil, criminal and family law cases in Ontario & Federal courts, as well as practicing immigration & citizenship law. Learn more at www.acmlawfirm.ca/gordonscottcampbell