Capital Cost Allowance for Depreciation
CCA Definition and Rates
The capital cost allowance (CCA) is one of many ways to reduce your business' taxable income in Canada. According to the Canada Revenue Agency (CRA), it's "a tax deduction that Canadian tax laws allow a business to claim for the loss in value of capital assets due to wear and tear or obsolescence." U.S. businesses have a similar deduction (see the IRS Overview on the Depreciation of Assets).
If you buy a property, computer, or other a piece of equipment to use in your business, you can't deduct the entire cost of it on your income tax for that particular year. Instead, you use capital cost allowance to deduct a calculated portion of the expense as an income tax deduction and continue doing this over a period of years until the property or the equipment fully depreciates.
What Is Capital Cost?
Capital cost is the total price paid for a property, which includes:
- the purchase cost
- any fees associated with buying the property, including legal, accounting, inspection, architectural, etc.
- the cost of any upgrades or improvements to the property that have not already been claimed as expenses
Note that if the property is real estate, you can only claim CCA on the building portion, not the land. The same goes for fees—those that apply to land cannot be claimed as CCA.
You can begin to deduct CCA when a property becomes available for use, that is when it begins to earn income for your business or, if not a building, when you receive the property and it is ready to be used. A building normally becomes available for use when you begin utilizing at least 90% of the premises for your business, or when upgrades or renovations are completed.
How Is Capital Cost Allowance Calculated?
How much CCA you can claim each year depends on when you acquired the property and the CCA class to which it belongs. The CRA has assigned classes to particular types of depreciable property, and there are assigned rates for each class.
CCA is calculated on a declining basis based on the asset's assigned rate and its worth after depreciation in that year. The CCA schedule on CRA Form T2125 will guide you through these calculations when you're preparing your taxes, but read on for an example below.
Do You Include the GST/HST You Paid?
This is probably the most common question about claiming capital cost allowance on income tax.
As the CRA explains it, "Generally, the capital cost of the property is what you pay for it." So, yes, when you're claiming CCA and first entering the capital cost of any property (buildings, furniture, or equipment), you will include GST, HST or any provincial sales tax you paid when you purchased the asset. You will also include any delivery or shipping and handling charges, if applicable.
Note that for most depreciable properties, when you are calculating capital cost allowance, you will only be able to claim half of their capital cost the first year because of the half-year rule.
For example, let's calculate the CCA on a business vehicle in its first three years of use.
- The vehicle was purchased for $30,000
- It belongs in CCA class 10, giving it a CCA rate of 30%. In the first year, you can only claim half of this, or 15%.
- In the first year, the CCA deduction would be $30,000 x 15% = $4,500.
- In the second year, the deduction would be based on its depreciated value of $25,500 ($30,000 - $4,500). So, the CCA would be $25,500 x 30% = $7,650.
- In the third year, the deduction would be based on its depreciated value of $17,850 ($25,500 - $7,650). So, the CCA would be $17,850 x 30% = $5,335.
- This would continue in subsequent years until the vehicle depreciates to zero or is disposed of.
Common CCA Classes and Rates:
|CCA Class||CCA Rate||Description|
|1||4%||Most buildings acquired after 1987, unless belonging to other classes. Also includes plumbing, wiring, fixtures, heating/air-conditioning equipment, etc.|
|3||5%||Most buildings acquired before 1988 unless belonging in Class 6. Includes alterations up to a maximum value of $500,000 after 1987.|
|6||10%||Log, stucco, frame, or metal buildings acquired before 1979 or used for farming or fishing or having no footings—includes greenhouses and fences. Also includes the first $100,000 of alterations made after 1978.|
|8||20%||Property not belonging to other classes, such as furniture, appliances, tools, machinery, equipment, etc. Includes photocopiers, fax machines, and telephone equipment.|
|10||30%||Motor vehicles and some computer hardware and software|
|10.1||30%||Passenger vehicles purchased in the current tax year and costing more than $30,000 (passenger vehicles have a $30,000 CCA limit)|
|12||100%||China, cutlery, linens, tools, software, etc. (except systems software)|
|43||30%||Eligible machinery and equipment used for manufacturing of goods for sale|
|46||30%||Network infrastructure equipment and software|
|50||55%||General-purpose electronic data processing equipment and systems software that is mainly for electronic process control or monitoring, communications, or data handling. Includes system software.|
For more detail about classes and rates see the Canada Revenue Agency's classes of depreciable property.