Undepreciated capital cost

The undepreciated capital cost (UCC) is the tax book value of an asset class — the running balance of how much of the asset class’s original cost is left to depreciate for tax purposes. It’s analogous to “book value” in financial accounting but follows CRA’s CCA rules, not GAAP.

UCC is class-pooled: all assets in the same CCA class are tracked together. When a new asset is bought, its cost is added to the class’s UCC; when an asset is sold, the salvage value is subtracted. Each year’s CCA expense is the current UCC times the class’s maximum rate $d$, and UCC drops by that amount.

The basic recursion, with the Half-year rule applied:

$UC{C}_{\text{reduced}}(n)=UC{C}_{\text{end}}(n-1)+\frac{1}{2}(\text{purchases in year }n)-(\text{dispositions in year }n)$

$CCA(n)=UC{C}_{\text{reduced}}(n)\cdot d$

$UC{C}_{\text{end}}(n)=UC{C}_{\text{reduced}}(n)-CCA(n)+\frac{1}{2}(\text{purchases in year }n)$

The half-year rule shows up in the first and third lines: only half of the year’s purchases enter the UCC pool for depreciation purposes that year. The other half waits in a “deferred” state and is added to the pool at the end of the year (so it’s available for full-rate depreciation starting the next year).

Key properties:

• UCC is for tax purposes only. The company’s GAAP financial statements use a different (usually straight-line) depreciation, producing a different book value.
• UCC does not track market value. The two can diverge dramatically over an asset’s life, especially for fast-depreciating tech or appreciating buildings.
• UCC is class-pooled. You can’t isolate one machine’s UCC from the rest of its class — they all depreciate together.
• When an asset is sold, the lesser of original cost and salvage proceeds is subtracted from UCC. If salvage exceeds original cost (rare, but happens for real estate), the excess is a capital gain, taxed under different rules.

If the UCC pool goes negative after a sale (the salvage exceeds remaining UCC), the negative balance is treated as recaptured depreciation — added back to taxable income that year. This claws back excess CCA the corporation took in earlier years.

In Engineering Economics problems, UCC tracking is mostly conceptual. The cleaner approach for PW analysis is to use the CTF and CSF shortcuts that bake the entire UCC trajectory into single multipliers.

For the rate and class definitions see Capital cost allowance. For the half-year rule see Half-year rule. For PW analysis see Capital tax factor and Capital salvage factor.