Capital Cost Allowance: understanding leasehold improvement allocations
Accounting for all possible deductions is an important part of income tax preparation. Capital Cost Allowance (CCA) is one of the tax deductions that many businesses often forget to take fully into account. There are many categories under CCA that businesses can take advantage of, and understanding each of them is an important process. Leasehold improvements are one of the deductions under capital cost allowance. This article will explore the correct tax treatment of such improvements.
What is Capital Cost Allowance?
Capital Cost Allowance is a type of amortization expense that a company is allowed to deduct from its income for tax purposes. It refers to the depreciation of property that you acquired with the purpose of running a business. There are different rules for calculating CCA depending on the classification of the property. For the purposes of CCA, “depreciable property” includes buildings, general-purpose electronic data-processing equipment, computer hardware, and vehicles It also includes patents, franchises, and licenses valid for a specific period. CCA also includes a class for “Leasehold Interest” which is where leasehold improvements can be deducted. Further information on CCA classes is available here.
What are leasehold improvements?
Leasehold improvements fall under “leasehold interest” according to the CRA. The CRA website refers to “leasehold interest in real property that is rental property” as the interest of a tenant in any tangible property that is under a lease agreement. Leasehold interest can fall within categories 1, 3, 6, or 13. Classes 1, 3, and 6 refer to specific building types, as well as the alterations and additions made to them. Meanwhile, class 13 refers to the capital cost incurred by a tenant while making alterations or improvements to leased property. Such improvements or alterations must be capital in nature and not included as part of the building or structure. However, leasehold improvements claims under CCA do not include amounts paid by a tenant to cancel a lease. Nor does it include amounts paid by a tenant instead of rent or as a prepayment of rent.
How to allocate Leasehold Improvements under CCA?
Leasehold improvements fall within the half-year rule for capital cost allowance claims. The half-year rule dictates that in the year in which you incur expenses related to a leasehold interest, you can only claim one-half of your net additions on a class-per-class basis. Considering leasehold improvements fall under class 13, you would only be able to claim one-half of your net additions to class 13. This rule applies to each property in which you have a leasehold interest. So calculations would be done per property.
Amortization of leasehold improvements is straight-line over the period of the lease, meaning that depending on your lease agreement, the amortization will be different.
Applying the correct Capital Cost Allowance rate to Leasehold Improvements
CCA rate on leasehold improvements varies depending on the type of leasehold interest and the terms of your lease. If you need help determining the correct rate for a specific leasehold improvement, working with a tax expert can ensure you are optimizing your CCA allowance. Our tax planning service can help you navigate this and any other tax questions, so you can deduct all eligible expenses. You can also work with our small business consulting team to determine the best solutions for your company.
Canada Revenue Agency – Rental Classes of Depreciable Property
CRA – How much CCA can you claim
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