What Is the Capital Cost Allowance in Canada?
Doing taxes is quite confusing, given all the different forms and due dates. With all the commotion surrounding the procedure, it’s easy to get lost in numbers and jargon. But one particularly important term you need to know is capital cost allowance (CCA), which can save you a lot of money if used correctly.
What Is Capital Cost Allowance?
In short, CCA is a yearly deduction on your taxes for the depreciation of certain capital assets or businesses. Such capital expenses can be vehicles, buildings, equipment, or tools used for business purposes. The allowance is governed by the Income Tax Act and is regulated by the Canada Revenue Agency (CRA).
Keep in mind you can’t deduct the full cost of all of the assets at once. The funds are pared down over a number of years, as these assets are expected to lose value, or depreciate, with time.
Types of Capital Cost Allowance
The CRA lumps CCA deductions into different classes, which are based on the type of asset being depreciated. The overall rate of depreciation may change from year to year, but the class of your asset will not. The total number of capital cost allowance classes has reached 12 in 2022, with some of the most common being:
Class 1 – Buildings Acquired After 1987
This class is for depreciating the value of buildings used in business or rentals, such as office space, warehouses, and apartments. The depreciation rate is 4% of the building’s total cost.
Class 2 – Buildings Acquired After 1988
The deprecation rate is 5% for all the buildings in this class, with any additions or alterations to the building being depreciated at a rate of 3%.
Class 8 – Property That Doesn’t Belong in the Any Other Classes
This class is a “catch-all” of sorts for any property that doesn’t fit neatly into one of the other 20 available classes. It includes furniture, appliances, computers, and office equipment. The depreciation rate is 20%, which is significantly higher than most other classes.
Class 10 – Passenger Vehicles and General-Purpose Electronics
This category includes the Capital Cost Allowance on vehicles, as well as data-processing electronics like computers, printers, and scanners. The CRA capital cost allowance depreciation rate for this category is 30%.
Class 43 – Eligible Manufacture Machinery and Equipment
This category is reserved for all the heavy-duty machinery used in a business, such as cranes, large vehicles used for hauling, and some agricultural equipment. The depreciation rate ranges from 30% to 50%, depending on the type of equipment.
How Is Capital Cost Allowance Calculated?
The calculation process for CCA can be pretty complicated and time-consuming. You’ll need to keep meticulous records of all your assets and their purchase prices, as well as any expenses related to them.
To make things easier, you can follow the Capital Cost Allowance calculator steps below:
Step 1 – Determine the cost of your asset. This is usually the purchase price, but can also include the cost of any necessary renovations or conversions.
Step 2 – Add up all the expenses related to your assets, such as legal fees, permits, and installation costs.
Step 3 – Use the CRA class chart to determine which category your asset falls into.
Step 4 – Determine the depreciation rate for your asset class.
Step 5 – Multiply the total cost of your asset by the depreciation rate. This is your CCA for the year.
Seeing as you can only claim a portion of your asset’s cost each year, you’re entitled to the Unclaimed or Undepreciated Capital Cost (UCC) of your property at the end of its lifespan. The UCC is the portion of your asset’s cost that you haven’t yet claimed through CCA.
For every year that you claim your CCA, the UCC gets by the amount you’ve already claimed. If you don’t plan on claiming your UCC, you can carry it forward to future tax years.
Should You Include the GST/HST in Your CCA?
The Goods and Services Tax (GST) is a federal tax that applies to most goods and services in Canada. The Harmonized Sales Tax (HST) is essentially the same thing, but it’s specific to certain provinces.
If your business is registered for the GST/HST, you can claim a tax credit for a portion of the GST/HST paid on business expenses. You should include the GST/HST paid on your asset in the total cost when calculating CCA.
Recapture of Capital Cost Allowance
In some cases, you may have to “recapture” all or part of the CCA you’ve claimed on an asset. This happens when you sell an asset for more than its adjusted cost base (ACB).
In other words, the Recaptured Capital Cost Allowance (RCCA) is the difference between the sale price of your asset and its ACB. If you make a profit on the proceeds of a sale, you’ll have to pay tax on the RCCA. Since this is considered a disposition of property, you’re expected to subtract the proceeds of the sale from your remaining UCC.
There are a couple of special considerations that you should be aware of when claiming CCA:
If you’re self-employed, you can claim CCA on eligible business expenses. These include the cost of office furniture and equipment, computers, vehicles used for business purposes, and renovations to commercial space. Any other assets that don’t fall into specific CCA categories and cost upwards of $500 can be classified as Class 8 property with a 20% depreciation rate.
The Capital Cost Allowance on a rental property is generally claimed by the owner of the property, not the tenant. If it’s a real estate property, the CCA claim is made against the building only and not the land. It should be deemed available for use, i.e. 90% of the property is utilized for rental purposes and isn’t closed down or undergoing renovations.
All things considered, the Capital Cost Allowance is a great way to reduce your taxable income and save up on expenses. It takes into account the depreciation of an asset’s value over time and lets you claim a deduction for a portion of the cost. As long as you stay up-to-date on the latest CRA regulations and keep meticulous records of your assets, you can take full advantage of this tax deduction.
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The CCA is an annual tax deduction that you can claim on depreciable capital assets. The CRA allows you to deduct a portion of the cost of certain assets each year based on their estimated lifespan.
The amount of Capital Cost Allowance you can claim each year is determined by the type of asset and its class. The CRA has a prescribed rate for each class, which is used to calculate the deduction.