I’ve brushed on Capital Cost Allowance (CCA) before when discussing rental property tax deductions and the CCA schedule for the purchase of a computer in 2009. However, as it can be a fairly complicated topic, I thought I would write a primer and explain the basics of CCA.
Capital Cost Allowance is basically the fancy tax term for claiming the depreciation of a business asset. Some expenses purchased under a business, like advertising, can be considered a current expense and can be claimed in the current tax year. Other expenses, like equipment, must be claimed as a capital expense and depreciated over a set schedule defined by the government. The depreciated amount of the equipment is claimed every year.
According to the governments economics division, the more formal definition of capital cost allowance is:
The cost of depreciable assets, such as buildings, furniture and equipment, acquired for use in business or professional activities cannot be deducted as an upfront expense when calculating net income for tax purposes. In recognition, however, of the fact that these assets wear out or become obsolete over time and are replaced, the federal government created the capital cost allowance (CCA). The CCA is a non-refundable tax deduction that reduces taxes owed by permitting the cost of business-related assets to be deducted from income over a prescribed number of years.
For rental properties, the building itself can be depreciated via capital cost allowance. The downside of claiming CCA on the building itself is that the investor will have to pay it back once the building is sold. It is generally recommended that CCA is NOT claimed on the building itself, however, you would have to contact a tax pro for your individual situation.
A common question about rental properties is if upgrades or repairs made to the property will count as a current expense or a capital expense. Generally speaking, if the expense was made to “upgrade” the property, then it should be claimed under the appropriate CCA schedule. For example, if appliances (class 8 – 20%) were purchased for the rental, then it would have to be depreciated accordingly every year. However, if the expense was more of a “repair”, such as if the existing refrigerator was broken and someone was hired to fix it, then it can be claimed as a current expense.
Another example is from a reader, he asked if he were to build a fence on a rental property if he could claim it that year. Under that circumstance, the addition of the fence should be considered a capital expense and depreciated every year. However, if he were to repair an existing fence, I think it would lean towards being a current expense.
The same rules apply for businesses. That is, if you purchase a piece of equipment for the business, then it’s most likely to be considered a capital expense.
What are the CCA Rates?
How to Calculate CCA
Calculating CCA is fairly straight forward but each category of capital expense has it’s own rate schedule as defined by CRA. What do you do with the rate given? There are two methods:
Declining Balance Method
This method is the most commonly used for most asset classes and is fairly simple to calculate. Note that in the first year, only half the normal CCA rate can be claimed.
Lets go back to our refrigerator example which is class 8 with a 20% cca rate. Lets say that the fridge was $1000 out of pocket.
|Year||Capital Cost||Capital Cost Allowance (amt to claim)
|1||$1,000||$100 (only 1/2 of 20% in first year)|
Straight Line Method
The straight line method is more specific to the asset and is defined by CRA. Using this calculation, the asset is depreciated by a set dollar amount, instead of a percentage, every year.
I realize that this tax topic can be a little on the dry side, but it’s important for landlords and business owners alike. The reason being is that not all expenses are treated the same. Some expenses can be counted as a current expense but others are capital expenses and need to be depreciated over time.
It’s important to note that this article is meant to be a primer on capital cost allowance. Any detailed information about your particular situation can be pulled from the CRA site directly or from contacting an accountant.