Capital Cost Allowance(CCA) Explained

If you own a rental property or run a self-employed small business, claiming Capital Cost Allowance (CCA) is a great way to reduce your taxable income.

You can use this deduction to allow your business to recoup some of the depreciation on certain assets, allowing you to keep more money in your pocket in the long run.

This article will explain how CCA works, how to claim it, and some considerations you should make based on your business or real estate rental situation.

What is Capital Cost Allowance (CCA)?

Capital Cost Allowance (CCA) is a tax deduction for business or property depreciation. It aids in offsetting some of the costs associated with wear and tear, breakdown, replacement, or other factors that cause your assets to lose value.

CCA allows you to deduct depreciation from the cost of any business or rental property that depreciates over time. Furniture, printers, computers, telephones, and other items are examples of property and items that may count towards the CCA. You can even deduct CCA on vehicles, office buildings, and musical instruments that you use to make a living.

However, keep in mind that you cannot deduct the full cost of these items as an expense all at once. Instead, you’ll have to claim it in small increments over a long period of time.

CCA increments are typically calculated using the declining balance method. The CCA rate is applied to the capital cost of the depreciable property, and the rate is applied against the remaining balance over the life of the property. The remaining balance decreases with each year that you claim CCA.

If you purchased a property in the previous year, you can claim CCA on the building. Assume the property was purchased for $100,000 and a CCA of $1,000 is claimed. The CCA claim for the following year is based on the remaining balance of the property’s value, which is $99,000 ($100,000 – $1,000 = $99,000). (As a reminder, you cannot claim CCA for the land’s value.)

Different Classes of Capital Cost Allowance and their rates

The CRA uses different classes to categorize your capital properties and how much CCA you can claim on them.

Here’s a table with some of the more common CCA class categories and how much you can deduct from their total annual cost.

Class Type of Property Percentage of cost that can be claimed per year
1 Most buildings acquired after 1987, unless belonging to other classes. Also includes plumbing, wiring, fixtures, heating/air-conditioning 4%
8 Any property that doesn’t fall into other classes, such as furniture, appliances, and data network infrastructure equipment 20%
10 Motor vehicles and some computer hardware and software 30%
43 Eligible machineries and equipment used for manufacturing of goods for sale 30%
46 Network infrastructure equipment and software 30%

For a complete list of CCA classes, go to the Canada Revenue Agency’s website.

How is Capital Cost Allowance (CCA) calculated?

To calculate CCA, you must first decide which properties or assets to include in your claim and which classes they belong to. You’ll also need to consider when you bought the property.

To determine your Capital Cost Allowance, follow these steps:

  1. Use the CRA’s chart of classes and list of capital property to determine which classes your purchases fall into.
  2. Group your expenses together by class, and add them together.
  3. Then, multiply the total in each class by its rate.
  4. The result is the CCA you can claim for the year.

Because you can only claim a portion of your total costs each year, you’ll have some left over amount that you can use in the future. This is referred to as Unclaimed Capital Cost (UCC) or Undepreciated Capital Cost (UCC). If the CCA is the value you lost due to devaluation over the year, the UCC is the value you still have.

Each year you claim CCA, the UCC on the property is reduced by the amount you claim for CCA, until there is no UCC amount left.

You are not required to claim your entire CCA. If you don’t have enough income to claim it, you can put it aside for a later year.

Here’s an example of calculating the CCA and the remaining UCC:

Let’s say in the first year, you purchased software licenses for $300. This expense will fall into class 10, which has a maximum percentage cost of 30%.

$300 x 30% = $90

This means you’ll have a CCA of $90, with $210 leftover as the UCC.

Now let’s assume the next year, you purchased a computer for $1,000. That year, you can claim 30% of the computer, or $300, as your CCA. The remainder of your computer’s cost ($700) is added to the UCC from last year ($210).

$700 + 210 = $910

This is the total UCC you’ll be carrying forward to the next year for Class 10.

Finally, let’s assume that in the third year, you didn’t make any purchases for your business. Since you have a UCC of $910 that’s from Class 10, you can once again claim 30% of that amount for this year assuming the class rate did not change:

$910 x 30% = $273, your CCA for this year.

$910 – $273 = $637, your UCC to carry to the next year.

Do I have to include the GST/HST that I paid in my CCA?

Yes, if you paid GST or HST when purchasing any properties related to your business or rental property, you must include those amounts in your total cost calculations when claiming CCA. This is because the Income Tax Act defines the capital cost of a property as the final price you paid for it, which includes sales tax if you are not registered for GST/HST.

In other words, because the capital cost of a property includes sales tax, your allowance calculations should also include it.

CCA Considerations for your self-employed business

When claiming CCA for home business expenses, there are a few things to keep in mind:

As a self-employed individual, you may be eligible for some CCA categories if you pay expenses for your home business. Buildings, vehicles, machinery, computers, and so on are all examples of potential CCA classes that you may be able to claim.

Any remaining assets that do not fit neatly into any specific classes and cost more than $500 are assigned to CCA class 8 at a rate of 20%. Office furniture and tools such as photocopiers and printers are examples of this.

CCA Considerations for a Rental Property

If you are a landlord who wants to claim the CCA for a real estate property, such as an apartment, keep the following points in mind:

Remember that if your asset is a real estate property, you can only claim the CCA on the building, not the land. In other words, the cost of the land itself cannot be deducted from your capital costs.

Before you can begin claiming CCA on your real estate property, it must first be considered ready for use. This means that at least 90% of the property is being rented out and is not being renovated or closed for upgrades.

Seems complicated? We’re here to help

Contact IDM CPA so we can walk you through the process step by step and make you feel confident your taxes are done right, and you get every dollar you deserve.

The IDM Team

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