What is Capital Cost Allowance (CCA)?

What is capital cost allowance (CCA) ?

So what, exactly, is capital cost allowance and how does it help small businesses and real estate investors? CCA is a tax deduction for business asset depreciation. Business property and assets lose value over time, from wear and tear, breakdowns, and general use. You can actually get back some of that value through CCA.

Most small businesses and rental property owners buy depreciating assets for business use—for example, maybe you furnish rental properties with kitchen appliances, or you equip your workspace with furniture, printers, computers, telephones, and other office necessities. You can even claim a CCA on vehicles, office buildings, and musical instruments that you use to earn income.

One very important thing to know, though, is that you can’t deduct the entire cost of these items as an expense all at once. Instead, you have to claim it in specific increments over many years. 

Why is capital cost allowance (CCA) important?

CCA is important because business equipment and property wear down and must be replaced. When you use manufacturing equipment to create goods for sale, for instance, that equipment requires maintenance; over time, you may need to buy new equipment. The capital cost allowance helps business owners like you offset the costs associated with those replacements, so your business can continue operating seamlessly and successfully. 

What are CCA class rates?

The rates of CCA classes tell you how much of a property’s cost you can deduct each year.

Since you’re able to claim only a portion of your total costs each year, you’ll have a leftover amount that you can claim in the future. This is known as undepreciated capital cost (UCC).

What are the classes of CCA?

To take it a step further, the Canada Revenue Agency (CRA) divides business assets into specific categories, referred to as CCA classes. Each of these classes has its own deduction rate allowance, which is a percentage of how much you can deduct from your taxable income for that expense. And while there are 25 classes, you probably need to pay attention to only the most common ones, which include:

Some of the classes can be a bit confusing. Class 1, for example, includes buildings and certain types of additions if they were purchased or built after 1987. Furthermore, that same class lets you take an additional 6% deduction (10% total) if you acquired a non-residential building after 2007 and use it to manufacture and process goods for sale or lease.

It’s also important to note that all businesses are subject to the half-year rule per the CCA class. Which generally means, in the year you acquire or make additions to a property, you can claim CCA on half of those additions. Then calculate your CC only on the adjusted amount. For instance, if your property is $30,000, you would base your CCA claim on $15,000 ($30,000 × 50%) in the year you acquired it. (There are some instances where the half-year rule does not apply.)

5 examples of CCA classes

How about we look at some scenarios to see how these deductions might work.

Example 1.

Let’s say in the first year of business, you purchased software licenses for $300. This expense will fall into class 50, which has a deduction rate of 55%.

$300 x 55% = $165

However, class 50 is subject to the half-year rule. This means you’ll have a CCA of $82.50, with $217.50 left over as the UCC.

$300 – $82.50 = $217.50

Example 2.

Attention rental property owners: class 8 is useful for you, as it covers the CAA for furniture and appliances. Perhaps a rental property in your portfolio needs a new refrigerator and you spend $1,200 on one. CCA class 8 allows a 20% deduction rate, so you’d expect to be able to claim $240 the first year, right?

$1,200 x 20% = $240

However, the half-year rule also applies here, which means you can only deduct 50% of that total. Thus, the first year you place a new $1,200 refrigerator into service, you’d be able to deduct $120.

$240 / 2 = $120

Future year rates are based on the remaining value. So in this calculation, for year two, you’d subtract $120 from the refrigerator’s depreciated value ($1,080 x 20% = $216) and that amount will be your second-year deduction.

Example 3.

If you’re a self-employed security consultant, you can use CCA class 8 as well, to deduct office furniture costs. At the same time, you might be able to use CCA class 10.1 for the passenger vehicle you use to travel to client sites, if it qualifies.

Example 4.

A small-batch candy company owner may find CCA class 43 useful for deducting 30% of costs associated with installing new candy-making equipment. 

Example 5.

A taxi company will find that CCA class 55 is an excellent tool for offsetting costs associated with upgrading its fleet to zero-emission vehicles. (If the vehicles had any special savings at the time of purchase, however, you will want to use class 16.) 

3 tips and reminders for a capital cost allowance (CCA)

1. How to claim a capital cost allowance

Claiming a CCA is completely optional. And when you don’t have enough taxable income to make use of the full amount, you can claim only part of it instead. When you do claim it, you’ll use something called a “declining balance” method. Each year that you claim CCA, the value of the asset declines. In order to correspond to the depreciation, you apply the CCA rate to the reduced value of the asset, or UCC, each year of your claim.This math gives you an idea. 

Year 2: $8,500 x 30% = $2,550 (UCC = $5,950)

Year 3: $5,950 x 30% = $1,785 (UCC = $4,165)

2. How to calculate CCA

Let’s say you bought commercial manufacturing equipment last year. That means you can use CCA class 43 to claim 30%. Assuming your equipment’s purchase price was $10,000, you can claim $3,000. However, you are also subject to the half-year rule and can only deduct 50% of that total ($1,500). That leaves you a balance of $8,500 ($10,000 – $1,500 = $8,500). 

The next year, your CCA claim will be on that reduced balance of $8,500, instead of the original $10,000.

3. Claiming CCA for appliances at a rental property

A CCA deduction is an excellent way to absorb some of the costs associated with owning a rental property—especially since you may find yourself replacing refrigerators or air conditioners more often than you’d like.