What Capital Cost Allowance (CCA) Classes Are Computers In?
How Much You Can Deduct Depends on the CCA for Computers Class
If you are in the process of filing your business tax return and the business has purchased any computer hardware/software, mobile devices, fax machines, printers, and/or related equipment and software in the previous fiscal year you will need to know what Capital Cost Allowance (CCA) classes the equipment belongs in.
For tax purposes different types of office equipment and software depreciate at different rates, hence the different CCA classes.
For example applications software (such as Microsoft Office) depreciates at a rate of 100% per year, whereas systems software (such as Microsoft Windows) depreciates at a rate of 55% per year.
Use this chart to determine what CRA CCA classes your computer assets belong in:
|8||Photocopiers and electronic communications equipment, such as fax machines and telephone equipment. Includes cell phones (although with the power of today's smartphones it could be argued that these are as much computers as phones, and therefore should belong to CCA class 50). The half-year rule (see below) applies.||20%|
|12||Computer application software (not systems software) - this includes end-user applications such as word processors, spreadsheets, accounting software, tax preparation software, database programs etc. Examples include Microsoft Office, Adobe Photoshop, etc. The half-year rule (see below) applies.||100%|
Data network infrastructure equipment that supports advanced telecommunication applications. It includes assets such as switches, multiplexers, routers, hubs, modems and domain name servers that are used to control, transfer, modulate and direct data. The half-year rule (see below) applies.
Does not include office equipment such as desktop telephones, cell phones, fax machines, copiers, or property such as wires, cables or structures.
|50||General purpose computer equipment and systems software for that equipment. This includes desktop computers, tablets, server computers, storage devices, monitors, disk drives, cables, and printers as well as pre-installed system software that operates these devices. It does not include equipment "used mainly" as:|
1. electronic process control systems (PCS) or monitor equipment;
2. electronic communications control equipment;
3. systems software for equipment referred to in 1. or 2.; or
4. data handling equipment (other than data handling equipment that is ancillary to general-purpose electronic data processing equipment). (Canada Revenue Agency).
Systems software is core software that provides services to end-user software. It typically applies to operating systems software such as Microsoft Windows, Mac OS X, or Linux. The half-year rule applies.
Is It an Expense or a CCA Asset Depreciation?
Nowadays many business users replace inexpensive mobile phones, laptops or tablets every two years or so and record the entire amount as a business expense, rather than depreciating the asset under CCA. There are no hard and fast rules for this, but for small amounts (under $500) the CRA does not seem to quibble with the practice.
As always, if you are in doubt check with your accountant.
The Half-Year Rule
The CCA "Half-year" rule states that the maximum you can depreciate assets in the year of purchase is half of the amount of your net additions in a particular class.
So for example, if in the current tax year you purchased some applications software for your business you would be able to claim CCA on half the cost of it, not all.
If You Don't Need the CCA Deduction in a Given Year You Don't Have to Claim It
CCA does not have to be claimed in a given year - it is cumulative. You can claim part of it, all of it, or none of it. If your business has a low-income year you can save your CCA deductions for a subsequent year in which your income is higher and the deduction will be more worthwhile.
Why Does Software Depreciate at Different Rates?
The CRA considers some times of software to be on an "enduring" nature - that is they may continue to be used for several years and therefore depreciate more slowly. For example:
- Software for large photocopiers and fax machines belongs in class 8 with a capital cost allowance rate of 20 percent
- Operating systems software, such as Microsoft Windows (desktop or server versions) belong in class 50
- Custom software that you have paid to have developed or customized for your business activities
Applications software, on the other hand, belongs in class 12 (100% depreciation), for the following reasons:
- Many applications are now wholly or partially cloud-based and require annual subscriptions
- Desktop applications used for tax preparation or accounting typically require major changes from year to year and need replacing or updating (see The Advantages of Using Small Business Accounting Software and The Best Small Business Accounting Software)
As mentioned above, since software belonging in class 12 is depreciated at the rate of 100%, it is often deducted as an expense rather than as a CCA asset.
Need help to figure out your CCA for your income tax? How to Calculate Capital Cost Allowance - A Must Know for Your Canadian Business provides a column by column guide to the T2125 form.