What is Capital Cost Allowance and why is it Useful?November 24, 2022
You may be wondering what a capital cost allowance is. Well, this is the amount of amortized expense that the Federal government allows companies to deduct from their taxable income for tax purposes. The rules for Capital Cost Allowance (CCA) are set by the Canada Revenue Agency (CRA). This applies to capital property like buildings, furniture or equipment that are used for your business. These things can become obsolete over time and you can deduct their cost over a period of a few years.
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Capital Cost and Rental Properties
When it comes to rental properties, claiming a capital cost allowance can be a little bit trickier. This is because the CCA is for depreciable property and real estate can increase in value. This doesn’t mean that you can’t claim capital cost allowance. It is one of the perks of owning rental property, along with writing off home owners insurance, rental expenses, maintenance fees, advertising fees, mortgage interest, utility costs, as well as property management fees if you choose to go that route.
The capital cost allowance is calculated based on the type of rental property that you own and:
- The purchase price (not the cost of the land)
- Any legal, accounting, engineering, installation or any other fees that are directly related to buying/constructing the rental property (nothing land related)
- Any additions/improvements that haven’t already been claimed
- Any building interest fees, legal fees, accounting fees or property taxes that haven’t already been claimed
There are income tax regulations and different classes that are based on the property types that specify what you can claim and how much you can claim per year . These amounts are specified by the CRA (Canada Revenue Agency). They also specify that most land isn’t depreciable property, only the buildings are since they can wear out over time.
Another thing to consider when claiming CCA on your rental property, is if the property is your primary residence or not. If it is, it can be complicated based on property value increases and capital gains. Before claiming any CCA on a rental property it is a good idea to speak with a tax professional. This can help prevent mistakes and owing more money in the future.
Calculating Capital Cost Allowance
There are a few different ways to calculate your CCA deductions, but, before you start getting into numbers, you want to group the depreciable properties you own into their appropriate classes that are deemed by the CRA. It is also important to keep in mind when you start these calculations that they are based on the current tax year and not the calendar year.
Once you have separated the properties into classes then you add the amounts together and multiple the total by the rate for that class. This number is then what you are able to claim as CCA for the year.
Each year you are only able to claim so much CCA so you will have some you are able to claim for the next tax year. This is known as UCC or Unclaimed Capital Cost or Undepreciated Capital Cost. You can claim every year until there is no UCC left.
The only year that is different when claiming CCA, is the year that the property is purchased/acquired. For this year you can only claim half of your net additions to a class. This is a provision of the Income Tax Act called the half year rule (50% rule).
Capital Cost Allowance and Depreciation
Unlike other business expenses, you can’t use the cost of property as a tax deduction. What you can do though is deduct the depreciation. How the Capital Cost Allowance works is that you can keep deducting the depreciation value until there is none left or the property has been sold. Because of this, CCA and depreciation may seem like the same thing, but they are different. CCA is a tax deduction and depreciation is an accounting practice.
How depreciation is calculated by an accountant is they estimate the useful life of the asset and then use then estimate to depreciate the asset periodically. This process reflects the assets declining value over time. This value can then be used for tax purposes known as Capital Cost Allowance.
Different Classes of Capital Cost Allowance
As we mentioned above, there are quite a few different CCA classes.
|Classes||Rates||Assets that Qualify|
|Class 1||4%||This applies to buildings acquired after 1987.|
|Class 8||20%||This applies to properties that don’t fall in any other categories.
For Example: furniture, appliances, tools $500 or more
|Class 10||30%||Computer hardware and software, motor vehicles, some passenger vehicles|
|Class 10.1||30%||Passenger Vehicles $30,000 plus before taxes.|
|Class 14||100%||Patents, licenses and concessions for limited time periods.|
|Class 16||40%||Taxis and car rental vehicles.|
|Class 29||Varies||Manufacturing and processing equipment for goods.|
|Class 44||Varies||Patents and licenses for any time period.|
|Class 45||45%||Data processing equipment or computer hardware.|
|Class 46||30%||Data network infrastructure equipment and software.|
|Class 50||55%||Data processing equipment, software and ancillary data processing equipment.|
|Class 54||30%||Zero emission vehicles that would be in class 10 or 10.1|
|Class 55||40%||Zero emission vehicles that would be in class 16.|
Some of these classes will be eligible for a first year enhanced allowance under the accelerated investment incentive. This will be eligible for certain properties that are subject to the general CCA rules and don’t fall under classes 43.1,43.2,and 53.
Capital Cost Allowance For Vehicles
The rates you can claim for CCA on a vehicle is based on how much you paid for the vehicle and what it is being used for. Listed above are the classes that pertain to vehicles and what rate you can claim on your tax return. As long as the vehicle is being used for business purposes you can claim this amount.
When it comes to Input Tax Credit (ITC) for vehicles you are claiming CCA on, if you use the vehicle for both commercial and non-commercial only the part of the CCA used towards the commercial activities can be used to calculate the ITC’s.
Examples of Capital Cost Allowance
While we already know that rental properties minus the cost of land can be used for Cost Capital Allowance, business vehicles and vehicles that are rented out qualify as well. These aren’t the only things though, there are a lot of things that fall into the CCA category such as:
- software licenses
Let’s go over a simple example of how to claim the CCA on one of these assets and what portion will be carried forward.
For example: Let’s say you have a piece of furniture that falls under class 8 that was purchased for $500. Class 8 allows you to claim 20% as Cost Capital Allowance.
500x.2 = $100
This leaves you being able to claim $100 with $400 in Unclaimed Capital Cost (UCC).
Claiming Capital Cost Allowance
Claiming the CCA is a great way to reduce the amount of taxes you pay every year. That being said, it is completely optional. You can choose not to claim it, claim part of it, claim one year and not the next, whatever makes the most sense for you and your tax deduction. It is likely it may not make sense to claim CCA. Thing about CCA is that it can’t be used to create a loss, it can only be used to bring your net income up to zero. In some cases it may even disqualify you from other tax deductions if you use it. A tax professional will be able to help you decide whether claiming this is a good idea for you.
If you choose to claim the CCA, how and what you claim depends on if you are employed, self-employed or have multiple assets or rental assets. In general, you calculate the CCA based on the cost of the asset and use the appropriate class rate. There are forms you fill out if you are doing the taxes yourself or a tax professional can help to make this claim for you.
If you have rental properties, rental assets or are self employed, there are certain instances where claiming the CCA would make sense for you. How and what you can claim for Cost Capital Allowance depends on the asset, when it was acquired and how long you have had the asset. You can keep claiming the UCC until there is no depreciation value left or you have sold the asset. Selling the asset but claiming CCA will also affect the tax benefits this has for you if they are in the same tax year.
It is important to remember that, while you can claim the depreciation value of a building, you can’t claim land. When calculating the CCA, the value of the land is deduced before the calculations are made. That is, if you choose to claim the CCA. Unlike other tax deductions, the CCA can’t be used to create a loss, it can only be used to bring your net to $0. Because of this, in some instances it may not make sense to claim the CCA. The nice thing about this is it isn’t mandatory. You can choose whether or not to claim it based on your individual situation. The CCA is a great tax deduction tool, but only if it benefits you. If you aren’t sure if this deduction is a good option for you, it is best to discuss it with a tax professional.