If you run a self-employed small business or own rental property, claiming Capital Cost Allowance (CCA) is a great way to reduce your taxable income. You can use this deduction to let your business recoup some of the loss of value of certain assets, helping you keep more money in your pocket in the long term.
If you’re looking to claim Capital Cost Allowance this year, this article will break down how CCA works, how it can be claimed, and some considerations you’ll need to make based on your business or real estate rental situation.
- The Capital Cost Allowance (CCA) allows you to recoup costs from your assets that have lost value over the course of your business operations.
- You may claim CCA at different rates according to which class they fall under.
- Unclaimed Capital Cost (UCC) can be carried forward to the next year and represents the remaining value of your property based on its initial cost and how much it depreciated over time.
What is Capital Cost Allowance (CCA)?
Capital Cost Allowance (CCA) is a tax deduction for the depreciation of your business or property. It helps counter some upkeep costs related to wear and tear, breakdown, replacement, or other factors that cause your assets to lose value.
CCA lets you deduct the depreciation from the cost of any property you buy for your business or rental property that depreciates over time. Some examples of property and items that might count towards the CCA are furniture, printers, computers, telephones, and more. You can even claim CCA on vehicles, office buildings, and musical instruments that you use to earn income.
But keep in mind, you can’t deduct the entire cost of these items as an expense all at once. Instead, you’ll have to claim it at specific increments over many years.
A declining balance method is usually used to calculate CCA increments. You apply the CCA rate to the capital cost of the depreciable property, applying the rate against the remaining balance over the life of the property. Every year that you claim CCA, the remaining balance declines.
If you bought a property the previous year, then you can claim CCA for the building. Say the property was purchased for $100,000, and $1,000 is claimed for the CCA. The following year, the CCA claim is based on the remaining balance of the value of the property, which would be $99,000 ($100,000 – $1,000 = $99,000). (Reminder – You cannot claim CCA for the value of the land.)
What are the different classes of Capital Cost Allowance and their rates?
There are different classes that the CRA uses to categorize your capital properties and how much CCA you claim on them.
Here’s a table that provides some of the more common CCA class categories and how much you can claim towards their total cost per year.
Class | Type of Property | Percentage of cost that can be claimed per year |
Class 1 | Most buildings acquired after 1987, unless belonging to other classes. Also includes plumbing, wiring, fixtures, heating/air-conditioning | 4% |
Class 8 | Any property that doesn’t fall into other classes, such as furniture, appliances, and data network infrastructure equipment | 20% |
Class 10 | Motor vehicles and some computer hardware and software | 30% |
Class 43 | Eligible machinery and equipment used for manufacturing of goods for sale | 30% |
Class 46 | Network infrastructure equipment and software | 30% |
You can visit the Canada Revenue Agency’s website for a full breakdown of CCA classes.
How is Capital Cost Allowance calculated?
To calculate CCA you need to take a look at which properties or assets you want to include in your claim and which classes they belong to. You’ll also need to take into account when you acquired the property.
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.
Since you’ll only be able to claim a portion of your total costs each year, you’ll have a leftover amount that you can claim in the future. This amount is known as Unclaimed Capital Cost (UCC) or Undepreciated Capital Cost. If the CCA is the value that you lost over the year due to devaluation, the UCC is the value that you have left.
Each year you claim CCA, it will reduce the UCC on the property by the amount you claim for CCA, until there’s no UCC amount left.
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.
Here’s an example calculation of the CCA and the leftover UCC:
Let’s say in the first year, you purchased software licenses for $300. This expense will fall into class 10, which has a maximum percentage cost of 30%.
$300 x 30% = $90
This means you’ll have a CCA of $90, with $210 left over as the UCC.
Now let’s assume the next year, you purchased a computer for $1,000. That year, you can claim 30% of the computer, or $300, as your CCA. The remainder of your computer’s cost ($700) is added to the UCC from last year ($210).
$700 + 210 = $910
This is the total UCC you’ll be carrying forward to the next year for Class 10.
Finally, let’s assume that in the third year, you didn’t make any purchases for your business. Since you have a UCC of $910 that’s from Class 10, you can once again claim 30% of that amount for this year assuming the class rate did not change:
$910 x 30% = $273, your CCA for this year.
$910 – $273 = $637, your UCC to carry to the next year.
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Do I include the GST/HST I paid in my CCA?
Yes, if you paid GST or HST when buying any properties related to your business or rental property, you should include those amounts as part of your total cost calculations when claiming CCA. This is because the Income Tax Act defines the capital cost of a property as the final price you paid for it, which (if you’re not registered for GST/HST) includes sales tax.
In other words, the capital cost of a property includes the sales tax, so your allowance calculations should include it as well.
Recapture of Capital Cost Allowance
If your disposition actually generates more than the amount of CCA you’ve claimed on the property since you purchased it, you’ll have a negative UCC amount. This is called Recapture of Capital Cost Allowance, meaning you actually got credit for more loss in value on your taxes than you lost in the real world when you sold it. As a result, you’ll need to return that credit back as income when filing your taxes.
The purpose of CCA is to help you when your business-related property decreases in value over time. But if you sell the property for an amount greater than the lost value that you claimed through CCA, you’ll be required to claim the difference as income. (Remember: If you get more than what you paid for the property in the first place, you could have a capital gain.)
Let’s go over an example calculation of Recapture of CCA where we continue from where we left off, with your work computer.
After using that computer for a couple of years, you decide to sell it for $600. Since this is considered a disposition of property, you’ll need to subtract the $600 from your remaining UCC.
490 – $600 = -$110
This leaves us with –$110, which is a Recapture of CCA. You’re considered to have deducted more on your taxes than you actually lost in value, which needs to be reported as income on line 8230 of form T2125 (or line 9947 of Form T776).
CCA considerations for your self-employed business
There are a couple of things to note when looking to claim CCA towards your home business costs:
- If you pay costs towards your home business as a self-employed individual, there are some categories of CCA that might be relevant to you. Buildings, vehicles, machinery, computers, etc. all fall into potential CCA classes you might be able to claim.
- Any leftover assets that don’t fall neatly into any specific classes and cost more than $500 fall into CCA class 8 at a rate of 20%. Examples of this include office furniture and tools like photocopiers, printers, etc.
CCA considerations for a rental property
If you’re a landlord looking to claim the CCA for a real estate property, such as an apartment, you should keep the following points in mind:
- If your asset is a real estate property, remember that you can only claim the CCA on the building, not the land. In other words, the value of the land itself can’t be claimed as part of your capital costs.
- Before you can start claiming CCA on your real estate property, it needs to be considered available for use. This means that at least 90% of the property is being utilized for rental purposes, and not under renovation or closed for upgrades.
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