Capital Cost Allowance (CCA) is a tax deduction that helps Canadians cover the cost of an asset's depreciation over time. Capital expenses can include investments such as buildings, furniture, and equipment used for business or professional activities. In this article, we will cover how to claim CCA on motor vehicles and rental properties.
What is the purpose of CCA?
CCA was created to account for the fact that business assets tend to wear out and lose value over time. In some cases, they can even become obsolete! These assets are considered depreciable property. Luckily, you can deduct the depreciation of capital expenses on your taxes over several years. In other words, CCA can help you save money by letting you recover some of the money lost as a result of depreciation. That being said, calculating this deduction can get complicated, and varies depending on what you are claiming it for.
What is the difference between a capital expense and a current expense?
CCA exists to help cover the depreciation of capital expenses. Capital expenses are different from current expenses in the sense that: A current expense (also known as an operating expense) is a recurring expense that provides a short-term benefit. This includes things like basic office supplies, inventory, or repainting the outside of a building. A capital expense is a purchase that provides a lasting benefit or advantage. For instance, this could be a major repair such as replacing the roof of a building. The cost of purchasing computer software or hardware is also considered a capital expense. Unlike current expenses, you cannot deduct 100% of a capital expense against your income to reduce your income taxes owing. Instead, you get to deduct the depreciation value of a capital expense over a number of years. For additional information on how to differentiate capital expenses from current expenses, consult the CRA.
How to calculate capital cost allowance for a vehicle
To claim CCA on the cost of a business vehicle, you need to start by figuring out which asset class your investment belongs to. Vehicles can belong to one of two asset classes: class 10 or class 10.1. The only exceptions are taxis, which belong to the class 16 category. Class 10.1 is for vehicles that meet one of the following conditions:
A vehicle was acquired after August 31, 1989, and before, January 1, 1997, if it cost more than $24,000.
Vehicle acquired after December 31, 1996, and before January 1, 1998, if it cost more than $25,000.
A Vehicle was acquired after December 31, 1997, and before, January 1, 2000, if it cost more than $26,000.
Vehicle acquired after December 31, 1999, and before, January 1, 2001, if it cost more than $27,000.
Vehicle acquired after December 31, 2000, if it cost more than $30,000.
Class 10 is for motor vehicles and passenger vehicles that do not meet any of the class 10.1 conditions described above.
CCA rules applicable to class 10 and 10.1 vehicles
In both cases, the base CCA amount will be equal to the amount paid after taxes. But, for the purposes of defining which asset class your vehicle belongs to, you must use the price you paid before tax. For class 10 and class 10.1 vehicles, the CCA amount is 30 percent of your purchase price after taxes. This means that if you bought a vehicle for $20,000 in Ontario in 2017, your total purchase price would be $22,600 after tax. Thirty percent of $22,600 is $6,780. This is your CCA amount. Note that your CCA amount will be based on the fair market value of your vehicle. According to the CRA, the fair market value of any asset is usually the highest amount you are likely to sell your property for in an open and unrestricted market between a buyer and a seller who are acting independently of each other. This means you cannot willingly pay more for an asset in hopes of deducting an inflated amount under CCA rules.
Keep in mind that CCA is based on your fiscal year. If your business has a fiscal year end date of June 30, and you bought your vehicle on January 1, you would only be able to claim 50 percent of your CCA for the purchase year. This is known as the "half-year rule" and it applies to most first-year CCA deductions. If your asset purchase was not made at the 6 or 12-month mark of your fiscal year, you can also prorate your CCA claim. To do this, deduct the number of days you had your asset from 365. For example, if you purchased your vehicle on June 1 and have a fiscal year end date of December 31, you will have had your vehicle for 214 days of the year. Divide 214 by 365 and multiply that number by your CCA amount. Based on the example described above, your CCA amount for the first year will be $3,975. In later years, you will be able to deduct the full 30 percent value of your purchase price until the entire value of your vehicle has been depreciated. Note that you do not need to claim the maximum CCA you are entitled to in a given year. You can elect to carry any unclaimed portion of your CCA over to a future year. To claim CCA, use Form T777 - Statement of Employment Expenses. In this form, Part A is reserved to calculate CCA for class 10 vehicles, and Part B is reserved for class 10.1 vehicles. If you have more than one class 10.1 vehicle, each one must be listed on a separate line.
How to calculate capital cost allowance on rental properties
In most cases, the capital cost of a property consists of the following elements:
The purchase price of the property (this does not include the cost of land, which is not depreciable);
Any legal, accounting, engineering, installation, or other fees related to buying or building property (again, this does not include any fees that apply to land);
The cost of improvements or additions made to your property after it was purchased, as long as you did not claim these costs as a current expense;
Any soft costs associated with the purchase of a building. This includes interest, legal and accounting fees, and property taxes paid while you were building, renovating, or altering the building – as long as these expenses were not already deducted as current expenses.
More CCA rental property rules you should know
As with business vehicles, you are not required to claim CCA every year. Since Capital Cost Allowance cannot be used to create a loss, if you do not have any income tax to pay in a given year, you'll probably want to postpone your CCA deduction. Your CCA limits won't expire until you've used them all up, so feel free to delay your claims if it makes financial sense to do so. The class 1 asset category is reserved for buildings purchased after 1987, in addition to certain additions or alterations made after 1987. The CCA rate for this class is set at four percent, with an additional allowance of two percent applied to non-residential buildings. If you acquired your building before 1988 (or 1990, in some cases), your building belongs to the class 3 category, with a CCA rate of five percent. This includes the cost of additions, repairs, and alterations made after 1987. If you acquired your building before 1979 and it is made of frame, log, stucco on frame, galvanized iron, or corrugated metal, then it belongs to the class 6 category, with a CCA rate of ten percent. This includes the first $100,000 of additions made after 1978. One of the most important things to consider is that you are supposed to claim CCA on the declining balance of your property, not on the purchase price. In other words, if you purchase a rental property with a building worth $100,000, a four percent CCA deduction would be $4,000 in year one. This leaves you with a remaining balance of $96,000. Because four percent of $96,000 is $3,840, that is the amount you would be allowed to claim in year two.
When can you start claiming CCA on a building?
According to the available for use rule, you can only claim CCA on a rental income property once it becomes operational. As an example, if you spend six months renovating a building and are not able to start renting it out until the next fiscal year, that property will not be eligible for CCA until the following year. In most cases, a building (or part of a building) becomes eligible for CCA as of the earliest of the following scenarios:
The date you start using 90 percent or more of the building for business purposes;
The tax year following the year you acquired the building;
The time just before you dispose of the building.
If you are building, constructing, or altering a building that you plan to use for business purposes, you can generally start claiming CCA as of the earliest of the following scenarios:
The date construction, renovation, or alteration was completed;
The date you started to use 90 percent or more of the building for your business;
The tax year following the year you acquired the building;
The time just before you dispose of the building.
Other CCA applications small business owners should know about
As stated above, CCA rules apply to capital expenses that provide a lasting benefit. This doesn't just include business vehicles and rental properties. If you invest in a capital expense that is not listed by the CRA, it might still qualify for CCA under the class 8 asset category. Class 8 expenses include all property that does not belong to another class. This includes furniture, appliances, tools that cost more than $500, machinery, outdoor advertising signs, and other equipment you might need for business purposes. This asset class also includes photocopiers and electronic communications equipment such as phones and fax machines. The CCA rate for class 8 capital expenses is 20 percent, In other words, you should be able to decline the cost of your purchase over approximately 5 years. To illustrate, if you buy a desk for $1,000, you should be able to claim it at a rate of $200 per year over a five-year period. The main thing to keep in mind when claiming CCA is that the rates vary from one asset class to the next. Whether you are claiming CCA for a vehicle or another business property, keeping detailed records of your expenses can help you back up your claims. Finally, claiming CCA isn't always easy! This is especially true once you start disposing of property or if some of your property is destroyed. In these scenarios, it can be a good idea to consult a tax professional.
