When you purchase certain items for your business, the Canada Revenue Agency (CRA) will not allow you to deduct the entire value of the item for the year of purchase. Instead, the CRA allows you to write off a portion of the item’s depreciable value over a period of several years. However, there is no set formula to determine this value. Instead, the CRA groups assets into different classes depending on a variety of factors.
Below are some of the most common classes for depreciable property:
Classes 1, 3 and 6
Buildings and most of their major components including electrical wiring, lighting fixtures, plumbing, sprinkler systems, HVAC equipment, elevators and escalators fit into class 1, 3 or 6. The CRA groups buildings into these classes depending on when they were built and the materials used in their structure.
Buildings made of frame, log, stucco on frame, galvanized iron, and corrugated metal or iron fall into class 6. Expenses related to installing any of the above components, major repairs, additions and alterations to these buildings also fall into this category. Class 6 has a Capital Cost Allowance rate of 10 percent.
However, if your building was built before 1979, has no supports below ground level, or is used in the pursuit of farming or fishing income, it will fall into a different category. In this situation, consult CRA for guidance on which class to use.
If your building does not fall into class 6 and you acquired it after 1987, the building will be considered a class 1 depreciable asset with a CCA of four percent. Buildings acquired prior to 1988 that are do not qualify for class 6 will be considered class 3, with a CCA rate of five percent.
For example, if you bought a building for your business for $100,000, it would typically fall into class 1 based on the date of purchase. On your tax return, you would be able to claim $4,000 as an allowable business expense.
However, if you purchased a building made of stucco, it would be considered a class 6 asset. In this scenario, the CCA rate would be 10 percent and you could claim $10,000 for the year of purchase.
Any property you have acquired that does not fall into another class will typically fall into class 8. The class often includes furniture, appliances, some fixtures, machinery and other equipment. Class 8 also includes electronic communications equipment, data network infrastructure equipment and systems software for that equipment. This class has a CCA rate of 20 percent.
The CRA includes electronic data-processing equipment, computer hardware and systems software in class 10. Items that fall into this category include computers, software and firmware.
Data-processing equipment also includes tablets, servers, or any equipment or system used to store, manipulate, manage, display, receive or transmit information. These items are subject to a CCA rate of 30 percent.
It is important to note that the CRA also includes most motor vehicles in this class. However, some restrictions exist in this category for motor vehicles. Before categorizing a motor vehicle as a class 10 asset, you should review the subsections of the CRA’s description of this class.
While items in class 12 are technically classed as depreciable assets, the class has a CCA rate of 100 percent. This means that you are able to claim these expenses as if they are current expenses.
When filing your taxes, you can include the cost of china, cutlery, linen and uniforms in this class. The cutting or shaping of parts of machines, as well as dies, jigs and moulds also fall into this category. Software that is not systems software also falls into this class.
For example, if you spend $100 buying a program for your computer, you may claim the entire amount since this category has a CCA rate of 100 percent.
In contrast, if you spend $100 on an operating system for your computer, this expense will be considered systems software. Since systems software falls into class 10, you may only deduct 30 percent of the purchase cost.
However, if you acquired tools, kitchen utensils, medical or dental instruments on or after May 2, 2006, the CRA will apply a $500 cap to your allowable claim. Instead of receiving the generous CCA rate of class 12, your expense falls into class 8. You can claim 30 percent of class 8 costs as expenses for the year of purchase.
Classes 29 and 43
Machinery and equipment used to manufacture and process goods falls into class 29, but only if you acquired the asset after March 18, 2007 and before the year 2016.
If an item falls into class 29, you do not claim a set percentage each year as you would with the majority of the other classes. Instead, you must claim 25 percent the year of purchase, 50 percent the following year and 25 percent the third year.
If your machinery or equipment was purchased outside of these dates, it will fall into class 43, which has a CCA rate of 30 percent.
For example, if you purchased a manufacturing machine for $10,000 in 2015, it will be categorized as class 29. You may claim $2,500 the year of purchase, $5,000 the following year and $2,500 the third year.
If you had purchased the same item in 2005, it will fall into class 43. For an item in this class, you can write off $3,000 the year of purchase, $3,000 the following year, another $3,000 the next year and the remaining $1,000 the fourth year.
Classes 45 and 52
For an item to be included in class 45, you must have acquired them after March 22, 2004 and before March 19, 2007. With a CCA rate of 45 percent, this class includes computers, systems software and other electronic data-processing equipment.
If you acquired an item after Jan. 27, 2009 and before Feb. 2011, it will fall into class 52, which has a CCA rate of 100 percent. If an item fits this description but was not purchased during these time periods, it will typically be categorized as class 10.