In some cases, you may have a recapture of capital cost allowance, and the Canada Revenue Agency will require you to report it as income. To understand recapture of CCA, it’s important to understand CCA, unclaimed capital costs and terminal losses. Here’s how it all works.
Capital Cost Allowance
When you buy capital property for your business, you cannot deduct its entire cost as an expense for the year of purchase. Instead, you must claim the expense incrementally over several years. This amount is known as the Capital Cost Allowance (CCA).
The Canada Revenue Agency groups capital property into classes, and the class of your property determines its rate.
For example, if you purchase a computer, it is categorized as class 10, which has a CCA rate of 30 percent. As a result, if you pay $1,000 for the computer, you can report $300 as a business expense in the year of purchase. The remaining $700 becomes part of your unclaimed capital cost.
Unclaimed Capital Cost
Your Unclaimed Capital Cost (UCC) is the amount of the capital costs you have yet to claim as business expenses.
When you complete your statement of business activities, you don’t make calculations using the UCC of each individual item you have purchased separately. Instead, your tax return groups everything together by class.
For example, if you purchased systems software for $400 in the same year you purchased your computer, both expenses falls into class 10. This means you may deduct $120 as an expense in the year of purchase, with the remaining $280 becoming part of your UCC.
This is grouped with the UCC from your computer. Your tax records will show that you have $980 UCC in class 10 — $700 from the computer plus $280 from the software. Any other capital costs in this class are also added to this total.
You must recalculate your UCC annually based on new property you have bought and money you have earned by disposing of property in each class. Then, you multiply your UCC by the CCA rate of the class. Ultimately, this determines your CCA for the year.
In some cases, the disposition of property triggers a recapture of CCA or a terminal loss.
Disposition of Capital Property
- Disposing of property includes selling it, giving it away or reassigning it for personal use.
- You have also disposed of capital property if it is destroyed or stolen.
- The CRA requires you to report all dispositions.
To calculate how the disposition affects your UCC for the year, you must complete area A of Form T2125, Statement of Business Activities.
Disposition and UCC
To calculate your UCC:
- Start with your UCC in any class and add the amount you spent on new property in the class.
- Then, subtract the proceeds you earned from the disposition of property in that class.
For example, to continue with the above example, if your UCC in class 10 is $980 and you purchased another item in that class for $1,000, these numbers combine to become $1,980.
Then, subtract the proceeds of disposition from this number. For example, if you decided to switch your computer to personal use, you should use its fair market value on the day you assigned it to personal use as the proceeds of disposition. Based on ads for similar used computers you find online, you assess its FMV as $700.
Subtracting this number leaves you with $1280. This is your current UCC — the amount of capital expenses you have remaining to claim in the class. Next, multiply this number by the CCA rate for the class. This will determine the CCA rate you claim for the year.
Recapture of Capital Cost Allowance
If your UCC at the end of the above calculation is negative, you have a recapture of CCA. You are required to report this amount as income.
For example, imagine you have $980 in UCC for class 10, you add nothing to the class, and you dispose of both your tablet and your computer. These items were stolen and your excellent insurance policy pays you $1400. When you subtract the proceeds of disposition ($1400) from your UCC, the difference is -$420.
As this number is negative, you have a recapture of CCA and have to report it as income. Write this amount on line 8230, Other Income, on Form T2125.
If the above number is positive and you have no property in the class, you have a terminal loss. For example, imagine your computers were stolen but you received no insurance payout. In this situation, your UCC was $980, you added nothing to the class and the proceeds of disposition were nil.
As you haven’t replaced the computers and own nothing in the class, you can claim $980 as a terminal loss. You may claim this loss against other sources of income.