Using the Capital Cost Allowance in Canada: A Guide
Want to ease your tax burden as a small business owner? Here’s a guide to using the capital cost allowance: the losses tied to asset wear and tear.
Things such as property and equipment can suffer from damage, or depreciate, over time. This can include vehicles, buildings, heavy equipment, and more. When these assets depreciate, they lead to a hidden cost: wear and tear does not show up in your financial records and it can be difficult to prove when it comes time to reduce your tax burden.
However, you can make use of capital cost allowance, or CCA, to account for the costs of depreciation. CCA can only apply to property that you own or hold a leasehold interest. It’s also good to know that CCA is optional, and sometimes is best claimed in the future should your small business move into a higher tax bracket.
What depreciates and what can be claimed?
Not all property depreciates over time, meaning that only certain types of property can be used to claim CCA. Land itself usually cannot be used for CCA as it does not depreciate. However, in some cases, you can claim an allowance for depletion if you are getting any income from the land itself in the form of gravel pits, woodlots, or quarries.
Any equipment being used for CCA must be usable for business purposes. Also, any new net acquisitions to a property class can only be used for half of the usual CCA for the first year, and if the first fiscal period is less than one year, you can only take a prorated CCA.
Spreading the cost out over time
Some equipment such as work vehicles will serve your small business for many years. Both vehicles and buildings are expected to serve you over a period of time. For this reason, when first purchasing a new piece of equipment or a building, you can’t simply deduct the entire cost for a single tax year. Instead, you’ll need to spread out the cost over your vehicle’s or building’s expected lifespan. This means that the cost you deduct will be spread over the course of years.
Things such as quick repairs, oil changes, and other fixes designed to only be useful for a short period of time do not apply to CCA. These expenses can be claimed in full during the tax year in which they take place.
How much CCA can you claim?
Capital cost allowance can vary depending on the property class you are claiming. The maximum percentage of each class that you can claim every year will be different. Computers and software, as well as vehicles costing more than $30,000 will allow you to claim a max of 30% for a tax year, while real estate purchased after 1988 and prior to 1988 will allow you to claim 4 to 5%, respectively. Other property classes include tools over $500 (20%), Furniture (20%), parking lots (8%), and boats (15%.) You can also claim a CCA of 20% for any other non-manufacturing equipment you are using for your small business.
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