A terminal loss is the mirror image of recapture: under ITA s. 20(16), when the last remaining property in a capital cost allowance class is disposed of for less than the class's undepreciated capital cost, the shortfall is fully deductible against income — not restricted to offsetting capital gains the way an ordinary capital loss is.
ITA s. 20(16) applies where “the taxpayer no longer owns any property of that class,” and the amounts that built up undepreciated capital cost exceed the amounts that reduced it — the reverse of the recapture test. Where both conditions hold, “there shall be deducted the amount of the excess” and, per paragraph (d), no further CCA is claimed for that class in the year. Because the deduction is fully against income rather than capped at the ½ capital-gains inclusion rate, a terminal loss is materially more valuable to a vendor than an equivalent capital loss would be.
Section 20(16.1) narrows the rule: it does not apply to a passenger vehicle costing more than $20,000, or to property replaced within 24 months at the same fixed location by the taxpayer or a non-arm’s-length person. Treadstone Law’s guidance confirms the class-emptying condition is the operative test: when depreciable property is sold for less than its remaining undepreciated tax value, and that sale leaves no other assets remaining in the same depreciation class, the shortfall can generally be claimed as a terminal loss — a deduction against income, not merely a capital loss — and that “multiple assets in a business sale must be analyzed class-by-class, not as one lump calculation,” which is exactly why terminal loss and recapture can both appear on the same deal, in different classes, at the same time.
A target’s Class 8 pool has an undepreciated capital cost of $95,000. In an asset deal, the last piece of equipment in that class sells for $40,000, and no other Class 8 property remains afterward. Because $95,000 exceeds the $40,000 recovered and the class is now empty, the vendor deducts the full $55,000 shortfall against ordinary income in that year. Had the same equipment instead sold for $120,000 against the same $95,000 UCC and a $150,000 original cost, the vendor would have $25,000 of recapture — taxable ordinary income — instead of a terminal loss: the identical UCC pool, priced on either side of it, produces opposite tax results.
See also: Recapture of capital cost allowance · Purchase price allocation · Section 22 election.
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