If you own a rental property, want to claim employment expenses, or operate a small business, chances are you’ve heard the term capital cost allowance (CCA). But what is CCA exactly? How is it calculated? Understanding CCA starts with understanding how expenses are treated by the Canada Revenue Agency.
Types of Expenses
As a small business or rental property owner, you can deduct the expenses you pay to run your business or rental on your tax return. In the eyes of the CRA, these expenses are divided into two categories – current and capital. Current expenses usually reoccur after a short time while capital expenses have a long-lasting benefit. If you purchase a printer or your office, the printer itself would be considered a capital expense while the paper you use to print your documents would be considered a current expense. The cost of buying the printer and the cost of buying the paper are treated differently on your tax return.
Current expenses can be deducted from your business’s income all at once in the year you incurred the expense. If you spent $100 on printer paper last year, the entire $100 can be claimed as an expense this year. On the other hand, capital expenses are deducted over time. If you spent $100 on the printer itself, only a portion of that amount can be claimed this year – the rest comes in future years. The amount you can claim per year is known as the capital cost allowance (CCA). Your per year claim depends on how your expense is classified by CRA.
The Canada Revenue Agency divides capital assets into a number of categories or “classes”. Each of these classes has a specific percentage you can claim each year as your capital cost allowance based upon the ordinary life-span of the asset. Imagine you purchase a rental unit. A few weeks after the purchase, your tenant lets you know that the fridge has broken down and needs to be replaced. Being a good landlord, you have a new fridge delivered the same day. Both the expense of the unit itself and the new fridge are both considered to be long-lasting and therefore capital assets. However, each asset is classed differently. The common class for the rental unit would be class 1 which has a rate of 4 percent. This means that each year you are allowed to claim 4% of the cost of the building on your tax return. The fridge would be class 8 with a rate of 20 percent. You’d claim only 20% of the cost of the fridge on your tax return each year. The remainder of the cost after claiming the rate is called Undepreciated Capital Cost (UCC).
Tax Time Tidbits
- In most cases, only fifty percent of the maximum allowed CCA can be claimed in the year you acquire the asset.
- You are not required to claim CCA. You can choose to take none, all, or something in between the maximum allowed CCA. You should still record the asset on your tax return the year you acquired it for future claims.
- CCA cannot create or increase a rental loss.
- Special calculations apply if an asset is sold or disposed of, especially if it is sold for more than the remaining CCA balance.
- For real estate purchases, only the building’s value is used for CCA – not the land.
- Living things such as animals, trees, and shrubs are not considered to be capital assets.
- When claiming CCA, it’s important to keep track of your balances as you will continue to use these figures year after year.
Linda bought a new couch for her rental property that cost her $1,500. She checked the CCA value for furniture to be class 8 which has a depreciable value of 20%.
- In the first year she can claim ½ of the CCA = ½ x 20% x $1,500 = $150
- The UCC left on the couch will be = $1,500 – $150 = $1,350
- Next year, Linda will use the $1,350 as the CCA at the beginning of the year, then she will depreciate by 20% = 20% x $1,350 = $270
- She will repeat the process every year until the couch has no more value
With step-by-step guidance and easy to follow instructions, TurboTax’s Self-Employed and Premier products take the guesswork out of CCA for small business and rental property owners. However, if you feel a bit overwhelmed, consider TurboTax Live Assist & Review, Self-Employed, and get unlimited help and advice as you do your taxes, plus a final review before you file. Or, choose TurboTax Live Full Service for Self-Employed * and have one of our tax experts do you return from start to finish (*not available for Quebec residents).