Capital Cost Allowance (CCA) is the tax term for depreciation and is used when capital assets are purchased. Examples of capital assets are a building, equipment, furniture or fixtures.
When a business buys a capital asset like a vehicle or if the owner of a rental property builds a detached garage on the property, they would need to claim CCA.
CCA – Rental Property
A rental property owner may have capital expenses related to their property – examples are hardwood flooring, adding new kitchen cabinets or upgrading the electrical system. Any expense that has a lasting benefit is usually considered capital.
Related: Lessons From a First Time Landlord
The building itself is obviously the biggest amount to claim CCA on, but claiming CCA year after year can lead to higher taxes paid in the future if the property is sold. This situation is called a ‘recapture’ of CCA. For this reason you should check with a professional on whether you should claim CCA at all – it might be to your advantage to not claim any.
Whether something is an upgrade or just a repair can be tricky. If it’s an upgrade – it’s capital. Otherwise it is a regular expense. A repair would be the costs of having someone fix an air conditioner while an upgrade would be getting a brand new air conditioner.
How to Calculate CCA
CRA uses pools when calculating CCA – all capital items are divided into classes and then pooled together. CRA has a table that is used to determine which class an item falls into:
The different classes have different rates. Computer software (Class 12) has the highest rate (100%) which is likely because software gets outdated so quickly.
The declining balance method is used to calculate CCA and the ½ year rule means that only half the amount of CCA normally allowed can be claimed in the year of purchase. This rule is meant to prevent people from buying expense capital assets right before year end, but then being able to claim a full year of CCA.
The undepreciated capital cost (UCC) is the amount that is still in the pool from the prior year. If nothing was bought last year or this is the first year of buying capital assets, this amount would be zero.
Example of CCA Calculation
John owns an I/T consulting business and bought $2,000 of computer hardware. This falls under class 10 with a rate of 30%. He would claim CCA as follows:
|Year||Capital Cost Allowance|
|1||$2,000 x 30% x ½ = $300|
|2||$2,000 – $300 x 30% = $510|
|3||$2,000 – $300 – $510 x 30% = $357|
In year 3, the UCC of the computer software would be $833. I should note that the above calculation is straight forward and assumes no additions or deletions to the pool. An addition (purchase) gets added in the year it was bought and would increase the UCC. A sale of an asset would mean the amount received for the asset gets taken out of the pool for that year.
Final thoughts: This article is only meant as an introduction to how CCA works. Things get tricky when there are purchases and sales in the same year, but the main idea is that it’s important to distinguish between regular expenses and capital expenses as they are treated differently for tax purposes.