As a business owner, you are likely aware of numerous tax benefits available to you. The main one is being able to deduct expenses against the income you earn. But did you know you can also claim a tax deduction for depreciation? Yes, it’s true! The deduction is called Capital Cost Allowance, or CCA for short.
If your business has depreciable property, such as a building, vehicle or equipment, it wears down over time. For accounting purposes, this is known as depreciation. However, there is also a tax deduction available for the same purpose. Continue reading to learn more about Capital Cost Allowance in Canada.
Table of contents
What is a Capital Cost Allowance (CCA)?
The Capital Cost Allowance definition is a tax deduction available for depreciable property. When you acquire an asset, such as a car, building or software, it wears out or becomes obsolete over time. Owning an asset is a benefit, but also carries risks with ownership. The Canada Revenue Agency (CRA) acknowledges this and allows you to deduct CCA in response.
What is depreciable property?
Depreciable property is any asset that is eligible for depreciation for accounting and tax purposes. Common examples of depreciable property include vehicles, real estate, computers, furniture, equipment, and software. In addition, depreciable property must be used for business purposes within a sole proprietorship, partnership or corporation. You cannot claim CCA on your personal residence or personal vehicle. The asset must be used to earn income.
Land is not considered depreciable property. If you own real estate, you can depreciate the fixtures on the land, but not the land itself. The reason for this is land tends to appreciate over time, not depreciate. For example, if you own a factory, you can depreciate the building and internal equipment and systems, but not the land it sits on. This means the value of the land and depreciable property must be separated for accounting and tax purposes.
CCA vs depreciation
CCA and depreciation go hand in hand, but they are not the same. Capital Cost Allowance is a tax deduction whereas depreciation is an accounting practice. In other words, CCA’s meaning in accounting is depreciation. CCA deductions are subject to rules set by the Canada Revenue Agency, mainly CRA CCA classes. You are only allowed to deduct a certain amount based on these rules. For depreciation, accountants estimate the useful life of an asset and depreciate it periodically based on that estimate. The practice of depreciation is used to reflect the declining value of an asset on the books. Furthermore, there are numerous Canadian depreciation methods that accountants can use. It is up to their discretion which one is most appropriate.
To keep things simple, it is common for CCA and depreciation to be the same. Many accountants choose to depreciate an asset in accordance with CCA to make filing taxes easier. This cuts down on administration because you only have to keep track of one calculation instead of two. However, this does not mean the depreciation on your books will always reflect an accurate useful life of an asset.
What is Undepreciated Capital Cost (UCC)?
You might come across the abbreviation UCC, but what is UCC in tax? The Undepreciated Capital Cost is the amount of the asset’s value that hasn’t been claimed for CCA yet. In other words, it’s the opening balance you use at the beginning of the year to calculate CCA.
Special rules
What is the half year rule for CCA? Great question! In the year you acquire an asset, you can only deduct half of the eligible CCA. This is known as the half year rule, or the 50% rule.
There is something called the available for use rule. This rule states you can only claim CCA when the asset is ready to be used. Let’s say you acquire a property, but need to renovate it, the property wouldn’t be ready for use. It would only be available for use when renovations are finished.
Finally, in the year you dispose of an asset, you will incur a recapture or terminal loss. These are the CCA tax terms used for a gain or loss. Simply put, if you incur a profit on the sale of an asset, you would incur a recapture, which is income on your tax return. But if you incur a loss on the sale of an asset, you would incur a terminal loss, which is a deduction on your tax return.
What are the different classes of Capital Cost Allowance and their rates?
Below is a summary of the common Capital Cost Allowance classes, tax deduction rates and depreciable assets. This table should serve as a reference for CCA calculations.
| CCA Classes Canada | CCA rates | Depreciable assets – CCA Canada |
|---|---|---|
| Class 1 | 4% | Buildings acquired after 1987. |
| Class 8 | 20% | CCA Class 8 is a catchall for property not eligible in any other Class, such as furniture, appliances, tools over $500, machinery, advertising signs, refrigeration equipment, photocopiers, electronic communications equipment, and other equipment you use in your business. |
| Class 10 | 30% | General-purpose computer hardware and systems software for that equipment. Motor and some passenger vehicles (unless they meet the requirements of Class 10.1 below). |
| Class 10.1 | 30% | Passenger vehicles worth more than $30,000 before sales taxes (GST/PST and HST). |
| Class 14 | 100% | Patents, franchises, concessions or licenses for limited periods. |
| Class 16 | 40% | Taxis and vehicles used in daily car rental businesses. |
| Class 29 | Varies | Machinery and equipment used in Canada to manufacture and process goods. |
| Class 44 | Varies | Patents or a license to use patents for a limited or unlimited period of time. |
| Class 45 | 45% | General purpose electronic data processing equipment, also commonly referred to as computer hardware. |
| Class 46 | 30% | Data network infrastructure equipment and systems software. |
| Class 50 | 55% | General-purpose electronic data processing equipment and systems software for that equipment, including ancillary data processing equipment. |
| Class 54 | 30% | Zero-emission vehicles that would otherwise be in Class 10 or 10.1. |
| Class 55 | 40% | Zero-emission vehicles that would otherwise be in Class 16. |
How to calculate Capital Cost Allowance
By this point, the calculation of CCA may seem daunting! You simply want to know how much capital allowance can I claim, but there’s so many factors to consider. Don’t worry, we’ve provided a breakdown of how to calculate CCA and examples below.
Capital Cost Allowance calculator
Use this formula for your capital allowance computation in years when you acquired a new asset or are reporting CCA for an asset you acquired before the current year. This table should be kept year over year, which is known as a CCA amortization schedule.
| Opening balance | The opening balance at the beginning of the year, also known as the Undepreciated Capital Cost (UCC) |
| Additions | Additions to the class in the current year |
| CCA half year rule | 50% of Additions |
| Dispositions | Amount received from disposal of an asset |
| Base for CCA | Opening balance + Additions – Half year rule – Dispositions |
| CCA rate | The prescribed CCA rate for the Class |
| CCA deduction | Base for CCA x CCA rate |
| Ending balance | Opening balance – CCA deduction |
Next, use this CCA formula in years when you dispose of an asset. If there are multiple assets in the class, you can use the above calculator instead of this one. The below formula should only be used when you’re closing the class entirely.
| Opening balance | The opening balance at the beginning of the year, also known as the Undepreciated Capital Cost (UCC) |
| Dispositions | Amount received from disposal of an asset |
| Recapture or Terminal Loss | Opening balance – Dispositions |
If the final amount is negative, you have a recapture. This amount must be reported as income. But if the final amount is positive, you have a terminal loss. Report this amount as a loss on your tax return.
Capital Cost Allowance example
Example 1: Acquiring an asset
In 2019, Gita purchased a non-zero emissions car to offer shared ride services. For CCA purposes, the asset falls under Class 16 with a 40% rate. The total cost of the car was $30,000 before taxes.
Gita earned $50,000 in 2019 through rideshare services. Her gas, car maintenance, car insurance and other expenses totalled $30,000. Gita’s net income before deducting CCA was $20,000. The year end for tax purposes is December 31. Since Gita purchased the car this year, the half year rule applies. Below is the calculation of Gita’s CCA.
| Balance at January 1, 2019 | $0 |
| Additions | $30,000 |
| Half year rule | $15,000 ($30,000 x 50%) |
| Base for CCA | $15,000 ($30,000 – $15,000) |
| CCA rate | 40% |
| CCA expense for 2019 | $6,000 ($15,000 x 40%) |
| Ending balance at December 31, 2019 | $24,000 ($30,000 – $6,000) |
For 2019, Gita would make a CCA claim of $6,000. Her net income for tax purposes after the CCA deduction is $14,000 ($20,000 – $6,000).
Example 2: Claiming CCA throughout the lifespan
Throughout 2020, Gita continues to offer rideshare services using the car she purchased in 2019 because it is a lucrative job. This year, she was able to earn $60,000 while her expenses remained at $30,000. Her net income before the CCA deduction is $30,000. It is tax time again and below is the calculation of Gita’s CCA for 2020.
| Balance at January 1, 2020 | $24,000 |
| Additions | $0 |
| Half year rule | $0 |
| Base for CCA | $24,000 |
| CCA rate | 40% |
| CCA expense for 2020 | $9,600 ($24,000 x 40%) |
| Ending balance at December 31, 2020 | $14,400 ($24,000 – $9,600) |
In 2020, Gita’s CCA calculation is $9,600. Her net income for tax purposes after the CCA deduction is $20,400 ($30,000 – $9,600).
Example 3: Disposing of an asset
During 2021, Gita finds a new job near her home in the middle of the year as she is tired of offering rideshare services. She no longer needs the car so she sells it to a local dealership for $10,000 before taxes. Gita earned $40,000 from her rideshare services and incurred $20,000 in expenses. Her net income before the CCA deduction is $20,000. Below is the calculation of Gita’s CCA for 2021.
| Balance at January 1, 2021 | $14,400 |
| Dispositions | ($10,000) |
| Recapture or Terminal Loss | $4,400 ($14,400 – $10,000) |
Because the amount above is positive, Gita has incurred a terminal loss. She would be required to report this as a loss against her rideshare income. Her net income for tax purposes after CCA is $15,600 ($20,000 – $4,400).
Making capital claims on your tax return
To claim CCA on your tax return, you must complete form T2SCH8, the CCA schedule. Essentially, this form shows the breakdown of the calculations above. Then, include the form with your tax return when you file.
CCA considerations
Additional considerations for CCA can be found below.
For vehicles
You might be wondering, can I deduct CCA on my personal vehicle? The answer is unfortunately no. Capital Cost Allowance is meant to be a business deduction, not a personal one. For this reason, you can only claim CCA on your vehicle if it is used to earn business income.
For rental property
If you own property that is rented out to a third party, you can claim CCA. However, the same is not true for residential properties that are not being rented out. In other words, you cannot deduct CCA on your personal residence.
For a self-employed business
Fortunately, CCA is available to self-employed businesses, not just corporations and other registered businesses. The main consideration is that the depreciable asset in question is being used to earn income for your business. From there, you can absolutely calculate and claim CCA as a self-employed business.