How can I benefit from capital cost allowance?
All companies need to purchase assets to do business, whether that’s a computer, vehicle or building. The cost of these assets can be amortized over the number of years they will be used. This can be done by claiming a Canada Revenue Agency (CRA) -regulated deduction called capital cost allowance (CCA).
Let’s take the example of someone entering the taxi industry this year. They buy a car that they plan to use for a few years. It costs, before tax, $20,000. They also have $10,000 in other annual expenses for things like gas, oil changes, registration and insurance. That means that $10,000 in annual expenses can be deducted from their $30,000 income.
For the car, they can use CCA to amortize its cost until the time when it reaches the end of its useful life.
Example of capital cost allowance
|Taxi $20,000 X 40% amortization||-$8,000|
How do you determine depreciation speed?
When you purchase an asset that you’ll be claiming under CCA, you need to determine how quickly it will lose its value (depreciation). Every category of depreciable property has its own set of rules.
Those categories, referred to as classes, are defined by the CRA in its Self-employed Business, Professional, Commission, Farming, and Fishing Income document. For example, Class 1 includes buildings, which has an annual depreciation rate of 4%. For Class 8, which includes furniture, appliances and machines, the corresponding annual rate is 20%.
Returning to the example of the taxi, with a value of less than $30,000, it fits into Class 16, with a 40% rate. Since it was purchased for $20,000 before taxes, $8,000 of CCA can be deducted from the company’s taxable income in the first year (after which the other rules mentioned below must be followed). Then, in the second year, the amount deducted will be 40% of $12,000 (or $4,800) and so forth.
Capital cost allowance rates by class
The table below provides a non-exhaustive list of depreciation rates by class and a general description of each class. CCA rules are complicated and include many exclusions, so be sure to validate this information on the CRA website, as well as with your accountant.
Most buildings acquired after 1987
Most buildings acquired before 1988
|Between 25% and 50%|
Class 54, 55 and 56
|30% or 40%|
Is it strategic to claim CCA in the first year?
To take advantage of CCA, you must actually be paying taxes. In the example of the taxi driver who earns $30,000 in income in their first year in business, the tax bill may be minimal, so it may be more beneficial for them to wait until their income increases before claiming CCA.
“You don’t have to claim CCA; someone may decide to hold off on claiming it until they have more taxable income,” explains Steve Kos, Technical Spokesperson for the CRA.
Ensure that the property you’re claiming will actually depreciate in value over time
One thing to be careful about is actual depreciation. If you decide to sell property that hasn’t lost as much value as expected, you’ll need to pay the government the difference. This is called recapturing CCA.
For example, if the taxi driver decides to sell their car after two years for $12,000 and has exactly $12,000 remaining in CCA, there’s nothing to adjust. If the car ends up being in worse shape than expected and the person sells it for $5,000, the $7,000 loss can be deducted from the company’s income. Conversely, if the person can sell it for $15,000, they’ll then have to pay back the CRA the $3,000 difference in recaptured CCA.
“It’s important when you start a business to be aware of these rules, so you don’t get any nasty surprises,” Kos says.
Now, consider a company that buys a commercial building for $1 million and claims CCA. If several years later there is a remaining $100,000 of CCA, the building is considered to have that $1-million-dollar value. But then, what if the company sells it for $1.5 million?
“Since the building has ultimately appreciated in value, the $900,000 that was depreciated needs to be recaptured and added to taxable income,” Kos explains. “Since the sale of the building generated $500,000 in capital gains and that amount will be taxed at 50%, another $250,000 is then added to the company’s taxable income. Selling the building would therefore cost an additional $1.15 million in taxable income.”
What is the maximum CCA that can be claimed in the first year?
The CRA’s rules for claiming CCA for the first year of purchase have gradually changed since 2018 with the introduction of the Accelerated Investment Incentive.
Under the old rules, the government limited what a company could claim from its maximum CCA to 50% for new purchases. That would mean that for the first year of the taxi purchase, only half of the $8,000 (or $4,000) could be claimed.
The new rules allow for more than the maximum amount to be claimed in that first year. So, while the cab driver was previously able to deduct $4,000 from his or her income in the first year, they can now deduct three times that amount ($12,000).
“This becomes an incentive for a company revamping and looking to buy a lot of new equipment—it provides them with a bigger tax refund,” Kos explains. “This can help companies that are growing.”
The current CCA is in place until December 2023. Its future will depend on upcoming federal budgets.
How does CCA work if you’re using an asset for both your business and personal use?
Assets are often used for both business and personal needs. “If that’s the case, you’ll have to reduce the CCA accordingly,” says Kos.
For example, if the person uses their taxi for personal needs half the time, the CCA should be cut in half. Instead of $8,000, they could deduct $4,000 for the first year. Under the old rules, that amount would be $2,000, or $6,000 with the accelerated investment incentive.
Kos suggests to not go it alone, so as to make sure you’re properly following the CCA rules, which he says are always changing. “It’s important to have the right accountant at your side.”