Capital Cost Allowance (CCA) is the tax deduction for depreciable property, property such as furniture, equipment or even buildings that wear out over time (depreciate).
Capital Cost Allowance means that when you buy depreciable property, you can’t just claim the entire cost of the property as an expense on Form T2125 when you are calculating your business or professional income; instead you have to deduct the cost of the depreciable property gradually over a period of years.
Think of it this way: if you buy a box of printer paper for your business, the paper is going to be consumed, and probably rather quickly. It provides a short term benefit. If you buy a filing cabinet, it’s going to be around for a long time, providing a long-term benefit.
So the printer paper is a standard business expense under Office Supplies while the filing cabinet is depreciable property that you will have to write off over time.
In tax terminology, the printer paper is a current expense and the filing cabinet is a capital expense.
Depreciable property is organized into different classes by the Canada Revenue Agency and the CCA class a property is in determines how much CCA you can claim on that property. The filing cabinets used as an example here fall into Class 8, for instance, with a CCA rate of 20%.
There are two rules that will affect how much CCA you can claim that you will need to know about:
The Available For Use Rule
You will only be able to deduct Capital Cost Allowance on depreciable property that’s available for use.
The Canada Revenue Agency defines this as “the earliest of:
- the time at which the property is first used by the claimant for the purpose of earning income; or
- the time the property is delivered or is made available to the claimant and is capable of producing a saleable product or service”.
The Half-year-rule states that in the year you acquire or make additions to a property, you can usually only claim Capital Cost Allowance on one-half of your net additions in a particular class.
So in the tax year you bought the filing cabinet for your business, you would only be able to base your CCA claim on half the cost of it.
This half-year-rule always apples when you transfer personal property into your business, such as a personal computer or a vehicle.
But some properties are not subject to the half-year-rule, such as those in CCCA Class 12, small tools.IT285R2 – Capital Cost Allowance – General Comments provides more information about this topic.
The Nice Thing About CCA
Your Capital Cost Allowance claim is like a running tally from year to year. So you don’t have to claim the whole amount of CCA you are able to deduct in any given year. You can claim all of it, none of it, or any amount in between and the CCA you don’t claim will be carried over and available to you in the next tax year – very handy if you have a low income year and don’t need to take your CCA deduction at that time.
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