Capital Budgeting on Karideph

[Griet van Vliet]

CCA! Why the hell is the ski resort's UCC on its 8-year-old snow-making equipment 3.5 million if they're operating on Karideph! In Talz-land sure, especially if their tax-basis EBITDA is marginal, but they should have fully depreciated the ski resort's snow-making equipment by now, even if it was a 7-year class for CCA! Griet thought, confused by the numbers the ski resort gave her, with its Talz CFO still believing that, under the terms of the tax treaty, they would be able to take CCA as if in Talz-land! They were considering buying 20 Wiz Cannons, at 6,100 each, that would allow them to ostensibly improve their service level, but their RRR was 9%.

"Assume the CFO's assumption is correct, in which case their CCA class is Class 8"

First phase: Revenues

• Assumed 45/ticket, 300/day, 7 days/week, open for 3 weeks longer (at 50/ticket) at a 25% rate
• 2% savings in equipment based on current sales levels
• 12,000/year in extra fixed expenses
• Rather than to work 3 days/week for 13 weeks, the 6 employees work 4 days/week for 16 weeks, 7 hours/day at 15/hour
• 1,000/week from sliding revenue, and 35% CM, with 15% increase from year 1 to year 2
• 36% total tax rate (16% clan tax rate)
• Salvage value: 300/unit after 4 years

 

[Griet van Vliet]

Current sales revenue: 1,228,500
Savings: 24,570
Year 1 sliding revenue: 5,600
Years 2-4 sliding revenue: 6,440
Extra CM: (45*0.27+5)*300*7*3 = 108,045

Additional expenses:

Extra maintenance and fuel: 12,000
Extra salaries: 15,750

Before-tax cash flows: 110,465 (year 1) 111,305 (years 2-4)
After-tax cash flows: 70,698 (year 1) 71,235 (years 2-4)

PV of the tax shield: 122,000*0.36*0.2*(1.045)/(1.09*0.29) = 29,039

Net initial investment: 122,000-29,039 = 92,961
PV of year 1 CF: 70,698*0.917 = 64,830
PV of year 2-4 CF: 2.320927*71,235 = 165,331


PV of disposal: 6,000*0.708 = 4,248
Ending UCC balance: 70,272
Tax shield reversal: 70,272*0.2*0.36/0.29*0.708 = 12,352
Terminal loss: 64,272*0.36*0.708 = 16,382

NPV: 145,478

 

[Griet van Vliet]

"Or perhaps the tax treaty allows such a thing because the ski resort is held by Talz interests. Now, the Talz CFO realized that they need to file tax returns on Karideph for the ski resort so the assumption is that a Section 179 election is made, which means the entire 122k is expensed the year it happens"

Then the net initial investment is 78,080, and the CCA recapture of 6,000 would result in a PV of the inflow of 2,719.

Net initial investment 78,080
PV of year 1 CF 64,830
PV of years 2-4 CF 165,331
CCA recapture 2,719

NPV: 154,800

 

[Griet van Vliet]

And now a memorandum needs to be drafted to that Talz CFO regarding not the choice of capital budgeting based on either Talz or Kari tax rules (but even the less favorable of the two, the Talz rules, still yields a positive NPV at 9% RRR), but on a nearby loft building that was destroyed in arson by local crime rings, on which he didn't take any CCA, as if the Kari allowed such a thing if it was used 100% as a rental property. The property's ACB and UCC is therefore 1.3 million, on which the insurance reimbursed him for 1.65 million, and plans to rebuild a similar rental property for 1.55 million, while using the remaining 100,000 to buy shares on the equity markets. The question was: how long did he have to start renting and how much gain is realized, recognized and, finally, the ACB (and starting UCC) of the new building.

VPN Accounting​

Karideph office​

Dear Talz CFO,

Regarding the non-recognition of the capital gain on the insurance settlement, the building must be complete and start hosting tenants by the end of the second fiscal year after the arson occurred for the election to be valid to the eyes of the Kari, as well as the Talz tax authorities, with respect to involuntary dispositions, the rules are identical in both jurisdictions.

As for the realized gain, the deemed proceeds of disposition is the insurance settlement, so 1.65-1.3 million = 350,000, of which 100,000 is recognized by buying stocks on the open market. The 250,000 that is unrecognized will then come to lower the ACB of the new property, so its ACB is 1.3 million.

Best wishes,
Griet van Vliet,
Partner, tax and assurance