The Canada Revenue Agency allows you to deduct farm expenses from your farm income when you file your tax return each year. However, when you invest in expensive machinery, equipment or buildings, you cannot write off the entire cost right away. Instead, you must write it off slowly over time using your capital cost allowance.
Capital Cost Allowance
CCA refers to the portion of an asset you are allowed to write off each year. The CRA has a number of different CCA classes, and each class has a different CCA rate. In most cases, the longer an asset is likely to last, the lower its CCA rate is and the longer it takes to deduct.
Examples of CCA Classes
Most farm buildings and building systems (HVAC, plumbing, electrical) fall into class 3 or 6, with CCA rates of 5 and 10 percent respectively. It takes roughly 20 years to write off an asset in class 3 and approximately 10 years to deduct an asset in class 6.
Computers, however, typically fall into class 45, with a CCA rate of 45 percent. This allows you to write off 45 percent the year of purchase, 45 percent the following year and the last 10 percent the third year.
To calculate your Capital Cost Allowance:
- Use the CRA’s chart of classes and list of capital property to determine which classes your purchases fall into.
- Group your expenses together by class, and add them together.
- Then, multiply the total in each class by its rate.
- The result is the CCA you can claim for the year.
However, you don’t have to claim your entire CCA. If you don’t have enough income to claim it against, you can save it for a future year.
Personal and Business-Use Property
If you have farm property that you use for both personal and business functions, you must figure out which portion of time the property is used for business. Then, you must multiply that percentage by the property’s cost to determine its capital cost. Finally, you can multiply the capital cost by the relevant CCA rate.
For example, if you drive your truck 10,000 kilometers for business and 20,000 kilometers total, you use it 50 percent of the time for work. As a result, you can only claim half of its cost as a capital cost.
Converting Personal Property to Business Property
If you convert your personal property into business property, its capital cost is its fair market value the day you started using it for business. Keep in mind, however, that if the FMV of the asset exceeds what you paid for it, you may have to report a capital gain on your personal tax return.
Grants and Subsidies
If you used a grant or a subsidy to pay for a capital asset:
- You have to subtract the amount of the grant or subsidy from the asset’s capital cost.
- Then, you can calculate its CCA based on the difference.
If you used an incentive from a non-governmental agency, you don’t have to subtract the subsidy from the capital cost. Rather, you can report it as income.