In this blog post, we will dive into what Capital Cost Allowance (CCA) is, why it’s used, and how it works. 

If you’re self-employed, run a small business, or own rental property, claiming the capital cost allowance (CCA) is a great way to reduce your taxable income.

What is Capital Cost Allowance (CCA)?

If you own a business in Canada, one of the key deductions you can claim to reduce your taxable income is the Capital Cost Allowance (CCA).

CCA is a tax incentive that allows businesses to deduct the cost of long-term assets over time, rather than expensing the full amount in the year of purchase. 

Why can’t you expense an asset in the year of purchase?

You can’t expense the full amount of an asset in the year of purchase because assets provide long-term value to a business and contribute to generating income over multiple years. 

Therefore, the Capital Cost Allowance (CCA) or depreciation for accounting purposes, is designed to align the cost of an asset with the revenue it helps generate over it’s useful life.

A capital asset (e.g., equipment, buildings) will provide value to your business over several years, so it’s cost is allocated across those years rather than being expensed all at once.

As an example:  A business buys a $20,000 machine that will generate income for 10 years. 

If the entire $20,000 is expensed in the first year, it does not accurately represent the income and expenses for subsequent years when the machine is still being used. Hence, that is why we use Capital Cost Allowance (CCA) to expense the cost of the asset over the useful life of an asset.

Some Capital Cost Allowance (CCA) Terminology You Need to Know

Capital Cost Allowance (CCA)

The amount a taxpayer can deduct annually to account for the depreciation of a capital asset.

CCA Rate

The percentage of the Undepreciated Capital Cost (UCC) of an asset class that can be deducted each year. Examples: Class 10 (Vehicles): 30%, Class 8 (Equipment): 20%, Class 50 (Computer Equipment): 55%

Half-Year Rule

A rule requiring businesses to claim only 50% of the allowable CCA in the first year an asset is acquired.

Undepreciated Capital Cost (UCC)

The remaining balance of an asset class that has not yet been deducted for tax purposes. It’s the starting point for CCA calculations each year. The formula to calculate UCC is as follows:

Ending UCC = Starting UCC + New additions – Disposals − CCA claimed

Capital Cost Allowance (CCA) is tracked in Classes – Not by individual assets

When claiming Capital Cost Allowance (CCA), it is calculated based on asset classes rather than individual assets to simplify administration, ensure consistency, and reduce complexity in tax reporting. 

Each class group has similar types of assets with the same CCA rate, and the calculation is done for the entire class instead of each asset separately.

Example: 

Imagine a construction company purchases three trucks and some tools for its operations.

• • Truck 1: $50,000
  • Truck 2: $60,000
  • Truck 3: $70,000
  • Tools: $20,000

Applicable CCA Classes:

• • Trucks are grouped in Class 10, with a CCA rate of 30%.
  • Tools are grouped in Class 8, with a CCA rate of 20%.

The initial UCC for Class 10 and Call 8 will be as follows:

• • Class 10 (trucks): $50,000 + $60,000 + $70,000 = $180,000
  • Class 8 (tools): $20,000

What is the Half-Year Rule?

The CRA applies the half-year rule to assets added to a CCA class during the tax year. This rule limits the CCA claim to 50% of the allowable deduction in the first year. It accounts for the fact that most assets are not in use for the entire year of acquisition.

Example:

You purchase a piece of equipment for $10,000 in a class with a 20% CCA rate.

Instead of deducting $2,000 (20% of $10,000) in the first year, you can only claim $1,000 (half of $2,000).

In subsequent years, the full rate applies.

How do you calculate Capital Cost Allowance (CCA) – An example:

Let’s walk through an example of how Capital Cost Allowance (CCA) is calculated over two years.

Example:

A business purchases equipment for $20,000 in Class 8 (CCA Rate: 20%) on January 1, Year 1. The half-year rule applies in Year 1. The business uses the declining balance method to calculate the CCA.

Year 1

• • Asset Cost: $20,000
  • Half-Year Rule:
    • Only 50% of the asset cost is eligible for CCA in Year 1.
    • Eligible cost for CCA = $20,000 x 50% = $10,000.
• CCA Deduction:
  • • CCA = $10,000 × 20% = $2,000.
• Undepreciated Capital Cost (UCC) at Year-End:
  • • UCC = $20,000 (original cost) – $2,000 (CCA claimed) = $18,000.

Year 2

• • Opening UCC: $18,000.
  • CCA Deduction:
    • CCA = $18,000 × 20% = $3,600.
  • UCC at Year-End:
    • • UCC = $18,000 – $3,600 = $14,400.

In Year 1, the half-year rule limits the eligible amount for CCA to half of the asset’s cost.

In Year 2, the full UCC is eligible for CCA. The process continues each year, with the CCA calculated as a percentage of the remaining UCC.

What is the Accelerated Investment Incentive?

The Accelerated Investment Incentive (AII) was introduced in Canada’s 2018 Fall Economic Statement to encourage businesses to invest in capital assets. It provides enhanced Capital Cost Allowance (CCA) deductions in the year an asset is acquired, allowing businesses to recover their costs more quickly and reinvest in their operations.

Key Features of the Accelerated Investment Incentive

• • Enhanced First-Year CCA Deduction: In the year an asset is acquired and made available for use, businesses can claim up to three times the normal first-year deduction. The measure increases the eligible portion of an asset’s cost for first-year CCA purposes.
  • Half-Year Rule Suspension: The half-year rule, which normally limits the first-year deduction to 50% of the eligible amount, is replaced by this incentive for eligible assets.

• • Applies to Most CCA Classes: The Accelerated Investment Incentive is available for most CCA classes, with a few exceptions (e.g., Class 1 buildings, Class 14.1 intangible assets, and certain vehicles).

What is Recapture?

Recapture occurs when the proceeds from selling an asset exceed the remaining UCC of the class. The excess amount is “recaptured” as income and added to taxable income.

Example:

• • UCC of a class: $5,000.
  • Asset sold for $7,000.
  • Recapture: $7,000 – $5,000 = $2,000 (added to income).

Why is recapture added to income?

A recapture occurs because the CCA deductions taken in previous years were greater than the actual depreciation or usage of the asset. Adding recapture to income ensures that the taxpayer doesn’t benefit from excessive tax deductions.

If an asset retains more value than expected at the time of sale, it suggests that previous deductions underestimated the asset’s longevity or usage.

What is a Terminal Loss?

A terminal loss happens when you sell all the assets in a class and the remaining UCC is greater than the sale proceeds. This loss is deductible from income.

Example:

• • UCC of equipment: $8,000.
  • Sale price: $5,000.
  • Terminal loss: $8,000 – $5,000 = $3,000 (deducted from income).

Why is a terminal loss deducted from income? 

A terminal loss reflects an actual economic loss, as the taxpayer has not recouped the asset’s cost through deductions or disposal. This indicates that the taxpayer did not fully recover the value of the assets through CCA deductions or sale proceeds.

Tax Planning with Capital Cost Allowance (CCA) 

Effective tax planning with Capital Cost Allowance (CCA) can significantly impact your tax liability, cash flow, and financial position.
By timing asset purchases, deferring CCA, and using additional tax tools like the Accelerated Investment Incentive, you can optimize CCA deductions to match your business needs. Here are some practical tips and strategies to consider:

Delay Asset Purchases if Income is Low

If your business income is low in the current year or you expect higher income next year, consider delaying the purchase of major assets to maximize CCA deductions when they will offset more taxable income next year.

Use Non-Capital Losses Before Claiming CCA

Non-capital losses (e.g., business losses from previous years) can be carried forward to offset taxable income. You should use these non-capital losses before claiming CCA, as CCA deductions can be deferred indefinitely.

Non-capital losses expire after a certain period (20 years for losses incurred after 2006; read more in our blog post here), while unclaimed CCA can be carried forward without limitation. Therefore, we would recommend that you apply non-capital losses first and save CCA deductions for future years when losses are no longer available.

Claim CCA Strategically

You are not required to claim the maximum CCA each year. You can claim any amount up to the maximum or defer the claim entirely. Deferring CCA may be beneficial if: (1) your income is low, and deductions won’t significantly reduce taxes, and/or (2) you expect to have higher taxable income in future years.

Optimize CCA for Short-Term Leases

If you’re leasing an asset for a short term (e.g., a vehicle), consider the tax implications of leasing versus purchasing. Leasing payments are fully deductible as an expense, but purchasing allows you to claim CCA. For short-term use, leasing may be more beneficial as it avoids the limitations of the half-year rule and provides an immediate tax deduction.

Plan for Disposals

Try to minimize the impact of Recapture:

• • Time the sale of assets in a year when income is lower.
  • Consider trading in assets instead of selling them outright to avoid high proceeds of disposition.

Try to maximize the impact of a Terminal Loss:

• • Consider timing disposals strategically to use this deduction in high-income years.

Consider Accelerated Investment Incentive (AII)

Take advantage of the Accelerated Investment Incentive, which allows you to claim up to three times the normal first-year CCA deduction for eligible assets purchased before 2028.

Rental Properties and Capital Cost Allowance (CCA)

The Capital Cost Allowance (CCA) rules for rental properties in Canada can be a useful but complex tool for tax planning. Here’s an overview of how CCA applies to rental properties, key rules, and considerations:

What CCA Can Be Claimed On?

• • Buildings: CCA can be claimed on the portion of the purchase price allocated to the building. Rental buildings typically fall under Class 1 (4% CCA rate) or Class 3 (5% for older buildings).
  • Equipment and Fixtures: Items like appliances, furniture, or heating systems are eligible for CCA in other classes (e.g., Class 8 for furniture or Class 43 for energy-efficient upgrades).
  • Land: CCA cannot be claimed on the land portion of the property.

Restrictions for Rental Properties

• • Cannot Create or Increase a Rental Loss: 

• • • • You cannot use CCA to reduce your rental income below $0. CCA can only offset the taxable rental income, not other types of income.

• • Principal Residence Exclusion

• • • • If you convert your principal residence to a rental property and later sell it, claiming CCA may disqualify you from using the principal residence exemption for capital gains.

Drawbacks of Claiming Capital Cost Allowance (CCA)

Claiming Capital Cost Allowance (CCA) can provide tax benefits by reducing taxable income, but it also comes with several drawbacks and risks. Understanding these potential pitfalls is important to ensure that claiming CCA aligns with your financial and tax planning goals.

Recapture on Sale

When you sell an asset for more than its remaining Undepreciated Capital Cost (UCC), the excess is “recaptured” and added to your taxable income for the year. Recapture can result in a significant tax liability, particularly for rental properties or assets that appreciate in value.

Cannot Create or Increase a Loss

CCA cannot be used to reduce your taxable income below $0. 

For example: If your rental income is $10,000 and expenses (excluding CCA) are $8,000, you can only claim $2,000 of CCA, even if more is available.

Principal Residence Exemption Impact

If you claim CCA on a property that was once your principal residence, you may lose eligibility for the principal residence exemption for the period during which the property was rented out.

Terminal Losses Are Only Realized When a Class is Emptied

If you sell an asset in a CCA class and the remaining UCC exceeds the proceeds of disposition, you can only claim a terminal loss if all other assets in the same class are also disposed of. This delays the tax benefit of the loss until the class is fully cleared, which might not occur for years.

Not Ideal for Short-Term Ownership

If you plan to sell an asset shortly after purchase, claiming CCA may not provide significant benefits and can result in recapture. The tax savings from claiming CCA in the short term might not outweigh the recapture liability on sale.

Common Capital Cost Allowance (CCA) Classes in Canada

Since assets are grouped into CCA classes, each has its own prescribed rate. Here are some common ones:

• • Class 1 (4% or 6%): Buildings

• • • • Description: Buildings used for business purposes, including structures and additions.
      • Rate: 4% (standard), 6% (buildings acquired after March 18, 2007, and used for manufacturing or processing).
      • Example Assets: Office buildings, factories, warehouses.

• • Class 3 (5%): Buildings

• • • • Description: Older buildings not included in Class 1.
      • Rate: 5%.
      • Example Assets: Buildings acquired before 1988 or with limited-use purposes.

• • Class 8 (20%): Furniture, Fixtures, and Equipment

• • • • Description: General-purpose assets used in the business.
      • Rate: 20%.
      • Example Assets: Desks, chairs, shelving units, tools, filing cabinets.

• • Class 10 (30%): Vehicles

• • • • Description: Passenger vehicles and general-purpose motor vehicles used in business.
      • Rate: 30%.
      • Example Assets: Cars, trucks, delivery vans.

• • Class 13 (Straight-Line): Leasehold Improvements

• • • • Description: Costs incurred to improve leased property.
      • Rate: Deducted over the lease term plus one renewal period.
      • Example Assets: Renovations, additions, or improvements to a leased office or retail space.

• • Class 14.1 (5%): Goodwill and Intangible Assets

• • • • Description: Intangible properties such as goodwill, trademarks, or customer lists.
      • Rate: 5%.
      • Example Assets: Franchise rights, incorporation costs, brand reputation.

• • Class 29 (50%): Manufacturing and Processing Equipment

• • • • Description: Specific equipment used for manufacturing and processing acquired after March 18, 2007, and before 2016.
      • Rate: 50% (straight-line depreciation).
      • Example Assets: Assembly line machinery, industrial presses.

• • Class 50 (55%): Computer and Electronic Equipment

• • • • Description: High-tech equipment used in business operations.
      • Rate: 55%.
      • Example Assets: Laptops, desktops, servers, routers.

• • Class 53 (50%): Manufacturing and Processing Equipment (Post-2016)

• • • • Description: Equipment used primarily for manufacturing and processing acquired after 2016.
      • Rate: 50%.
      • Example Assets: CNC machines, packaging machinery.

If you’d like to see the full, list you can consult the CRA guide here.

Do you need with your calculating your Capital Cost Allowance (CCA) claim or have any questions? Let us help you. Get in touch with us here or sign up to get more accounting and tax tips in our newsletter here.

The accounting and tax information provided in this post does not constitute advice and is meant to be for general information purposes only. The information is current as at the date of this post and does not reflect any changes in accounting and/or tax legislation thereafter. Moreover, the information has been prepared without considering your company or personal financial/tax circumstances and/or objectives.