Capital cost allowance (CCA) allows Canadian businesses to annually claim depreciation expenses for capital assets under the Income Tax Act. This article describes how to calculate CCA and how to fill in the CCA schedule.
What Type of Business Do You Have?
The procedure of calculating CCA is the same for both forms. When you look at Area A/Schedule 8, you will see a table with eight different columns and a separate chart for Motor vehicle CCA.
To calculate CCA, list all the additional depreciable property your business has bought this year. Then, determine how much of the purchase cost of each property you can claim as an income tax deduction by assigning a CCA class to each type of property. Add these amounts up and apply the total to the CCA balance you may have carried over from last year (if any).
The CCA Table
Column 1 (Class number)
Here, record the CCA class numbers of your depreciable property. (Need a review? The Canada Revenue Agency provides a list of common depreciable property and their CCA classes in their T4002 - Business and Professional Income Guide.) Logically, you will fill out this column until you’ve completed Column 3, Cost of Additions.
Column 2 (Undepreciated capital cost (UCC) at the start of the year)
In Column 2, fill in your running balance for each CCA class from last year. This information will be in Column 10 of your last year’s T2125 form, or, if you used income tax software to complete and file your income tax last year, it should already be filled in for you.
Do not put anything into Column 2 if this is your first year claiming CCA.
Column 3 (Cost of additions in the year)
Here, list all the depreciable property you have either acquired during the current tax year or to which you have made improvements.
Note that before you do this, you will need to complete Area B - Details of equipment additions in the year and possibly Area C – Details of building additions during the year also because you must list your depreciable property according to the CCA class.
For example, in Area B, for instance, you will not only be listing the details of the equipment you acquired or improved over the past year (such as the new truck you bought) but grouping the equipment into the appropriate CCA classes and putting each class on a separate line.
Column 4 (Proceeds of dispositions in the year)
In Column 4, summarize your gains or losses from any depreciable property you disposed of during the last tax year. As with Column 3, you must first complete Area D or Area E of form T2125 before you can fill out Column 4.
In Column 3 of Area D or Area E (depending on whether you have disposed of equipment, a motor vehicle, or a building), enter whichever of these amounts is less:
- your proceeds of disposition minus any related expenses; or
- the capital cost of the property.
Next, complete the Personal and Business columns of Area D or E with the appropriate percentages. For instance, if you have bought a snow blower for your business but also use it to blow snow at your residence, you would enter 10% for personal and 90% for business in the personal and business columns for this piece of equipment.
When you have completed Area D and/or Area E, copy the numbers from Column 5 for each CCA class to Column 4 of Area A for each class.
Column 5 (UCC after additions and dispositions)
Column 5 is calculated by adding Column 2 and 3 together and subtracting Column 4.
For each class, if the amount in Column 5 is negative, add it to income as a recapture on line 8230, "Other income," in Part 3 on page 1. If no property is left in the class and there is a positive amount in the column, deduct the amount from income as a terminal loss on line 9270, "Other expenses," in Part 5 on page 2.
Note that recapture and terminal loss do not apply to a class 10.1 property (passenger vehicles that cost over $30,000). For more information, see Chapter 4 of Guide T4002, Business, and Professional Income.
You may also wish to read Tax Interpretation Bulletin IT-478R2 – Capital Cost Allowance, Recapture and Terminal Loss.
Column 6 (Adjustment for current-year additions)
This column is used to apply the half-year rule. In most cases, you can only claim CCA on one-half of your net additions in the year that you acquire or make additions to a depreciable property.
For instance, if you purchased a new washer and dryer for your bed and breakfast business, which cost $6,000, you must base your CCA claim on half that amount ($3,000) in the tax year the purchase was made.
If applicable, subtract Column 4 from Column 3 and put the result in Column 6, entering a “0” if the number is negative.
Column 7 (Base amount for CCA)
Column 5 minus Column 6 will give you the entries for this column.
Column 8 (Percentage rate)
In Column 8, enter the CCA percentage rate appropriate to the class. For example, a new laptop would belong in CCA Class 50 with a CCA rate of 55 percent. (See the Canada Revenue Agency’s T4002 – Business and Professional Income Guide for a complete listing of CCA classes.)
Column 9 (CCA for the year)
In this column, you first determine your maximum possible CCA deduction for each class by multiplying the base amount for CCA (Column 7) by the CCA rate for that class (Column 8). Then, enter the CCA amount you choose to deduct this tax year. You can choose to claim all, none, or any amount in between. Remember that the CCA amount you do not use this year will be available to you next year.
The total of all of the amounts in Column 9 is entered on line 9936 “Capital cost allowance (CCA),” in Part 5 of Form T2125.
If this is your first year of business and your fiscal period is less than 365 days, you must prorate your CCA claim based on the number of days you were actually operating during the year.
For example, if you started your business on August 1 and your fiscal year end date is December 31, your actual fiscal period for your first year is 153 days rather than 365.
So, if you originally calculated your CCA claim to be $3,800, you must prorate your claim according to 153 days and claim $1,592 that year ($3,800 x 153/365).
Column 10 (UUC at the end of the year)
Subtract Column 9 (your chosen CCA claim amount for the year) from Column 5 (your UCC after additions and dispositions) to determine how much undepreciated capital cost is left in each class. When you calculate your CCA for the next tax year, this is the amount that will appear in Column 2.
(Remember to enter “0” in this column if you have a terminal loss or a recapture of CCA.)
If in Doubt, Have an Accountant Review Your CCA Information
In some cases, for example, property repairs, it may be unclear as to whether an expenditure qualifies as an expense (in which case it can be deducted as such) or whether CCA applies and if so, to which class it belongs. If you are uncertain about these or any other aspect of CCA calculations, have an accountant review your tax return.
Tax Software Makes it Easier
Computing CCA is one of the many benefits of using accounting software. There are a number of inexpensive, easy to learn, cloud-based accounting packages available for small businesses. Top Canadian Tax Software Programs presents information on the best income tax applications for small businesses.