The cost of a capital asset is generally not deductible as an expense. However, you can depreciate certain business assets for tax purposes. The tax term for such depreciation is “capital cost allowance” (CCA).
Depreciable assets are grouped into classes according to their type and use. There are more than 50 different classes, each with its own rate of depreciation.
The government also adjusts CCA rates to provide economic incentives or to better reflect the useful life of the property. The following are some of the more significant examples:
- Manufacturing and processing (M&P) machinery and equipment that would otherwise qualify for a 30% CCA (Class 43) will, for a limited time, qualify for an accelerated write-off. Eligible purchases acquired before 2016 will qualify for a 50% straight line accelerated CCA rate and will be placed in Class 29. Eligible purchases acquired after 2015 and before 2026 will qualify for a 50% declining balance accelerated CCA rate (new Class 53).
- Buildings acquired after March 18, 2007 and used for M&P in Canada qualify for a CCA rate of 10% as opposed to 4%. To claim the 10% rate, at least 90% of the floor space must be used in manufacturing or processing in Canada. Other non-residential buildings acquired after March 18, 2007 that are not used 90% for M&P may qualify for a CCA rate of 6% as opposed to 4%. To claim the higher CCA rate, the taxpayer must elect to include the building in a separate prescribed class (Class 1). This election is made by attaching a note in the taxpayer’s income tax return for the tax year in which the building is acquired.
- The CCA rate for computer hardware and systems software has gradually increased from 30% to 55%, except for a temporary period from January 28, 2009 until January 31, 2011 when such property was eligible for a 100% write-off. Such purchases are now placed in Class 50, which is eligible for a 55% CCA rate.
Most classes of assets are depreciated on a declining- balance basis. Some of the more common CCA classes and their applicable CCA rates are noted in the tables at the back of this book.
The amount of depreciation you can claim for a year is determined by multiplying the remaining balance in the asset class by the specified percentage rate for that specific class (generally pro-rated for short taxation years). The remaining balance, referred to as the undepreciated capital cost (UCC), is calculated on a continuous basis.
Each year (subject to the available-for-use rules—see below), you add the cost of assets acquired in the year to the previous year’s closing balance. If you have disposed of an asset, you subtract the proceeds up to the original cost of the asset.
The amount of CCA determined by this method represents the maximum amount that can be claimed. You do not have to claim the maximum amount. For example, if your business is in a loss position, you may decide not to claim depreciation for that particular year.
The half-year rule
Most depreciable assets are subject to a rule that reduces the maximum depreciation claim in the year of purchase to half the net additions made to the specified class. This “half-year” rule doesn’t apply to the acquisition of certain capital property, such as tools costing less than $500. Such assets can be written off 100% in the year of purchase.
The available-for-use rules determine the taxation year in which an amount can first be claimed for depreciation and whether the half-year rule will apply. Rules with respect to the acquisition, construction and/or renovation of a building are especially complex. It’s best to ask your tax adviser about the rules in this area. However, the general rule is that property may be depreciated for tax purposes at the date it’s first used to earn income, or the second taxation year following the year of acquisition, whichever is earlier.
Special rules and restrictions
Some depreciation restrictions apply to rental property (see topic 133). Others apply to depreciation claims arising from certain “tax shelters” in which the investor is not active in the day-to-day operations of the business. Depreciation claims by taxpayers who lease certain types of property are also subject to certain rules. Since the rules do not apply to all leasing properties, your tax adviser is in the best position to determine if you’re affected by these rules.