Capital Cost Allowance: How to Calculate CCA Classes

When you begin claiming business expenses, it’s important to understand the difference between an immediate expense, which is fully deductible in the year that you incur it, and a depreciable expense, which is deducted over time.

With regular business expenses, you can claim the full amount in the year the expense happened. However, you need to be aware that some expenses are depreciable. These are costs that, while also part of the expenses used to calculate net income (or loss), are subject to Capital Cost Allowance rules.

What is Capital Cost Allowance?

Capital Cost Allowance: How to Calculate CCA ClassesCapital Cost Allowance is a set of rates stating the amount you can claim each year on a depreciable property used for business activities. In the first year, you can only claim based on half the amount you paid. This rule is in place because if you acquired the equipment during the year, there is not a full year of depreciation.

How to Calculate CCA

Below is an illustration of how you use CCA to deduct equipment for your business. Say you bought a desk for $500. This falls under CCA’s Class 8, “Other Property”. Class 8 has a rate of 20%.

  • First Year $250 (half of $500) x 20% = $50 expense claim. This leaves a value of $450 next year.
  • Second Year $450 x 20% = $90 expense claim. This leaves a value of $360 next year.
  • Third Year $360 x 20% = $72 expense claim. This leaves a value of $288 next year.
  • You continue depreciating the desk this way until you are at $0

These calculations are done in Area A and Area B on page 4 of the T2125 form. It’s important to understand what class the equipment falls into, so that you can properly depreciate your equipment.

CCA Classes for Home Businesses

If you have a home business, the following four classes would likely be of the most interest to you:

  • Computer equipment and systems software: Class 50 (55%)
  • Data Network Equipment: Class 46 (30%)
  • Small tools ($500 limit): Class 12 (100%)
  • Other Property (furniture, appliances, fixtures, machinery, and equipment): Class 8 (20%)

You can find all the CRA’s CCA classes on their website.

As the claimable part is calculated with expenses, this is another case where you can claim expenses that exceed your business income.

What If You Receive Government Help?

It’s also important to understand how the Capital Cost Allowance works in conjunction with help from the government. In some cases, you might receive a business grant or a subsidy to help you buy equipment for your business. You will need to subtract the amount of the grant from the capital cost. Make the subtraction before you perform your depreciation calculations.

In our example above, if you receive a $200 subsidy to help you purchase that desk, you will start out with a capital cost of $300, rather than $500. That will change how much you can claim for depreciation over all. However, since you didn’t have to pay the entire amount for the desk on your own, it tends to even out.

It’s also possible to receive an input tax credit if you paid GST/HST on some of the depreciable property you bought for use in your business. This can provide you with a little extra help come tax time, so that you aren’t losing ground to other taxes on your capital costs.

Deferring Capital Gains or CCA Recapture

If you decide to depreciate your capital costs, you will also have to pay taxes on capital gains. If your capital property actually gains in value, and you receive more back than you paid for it when you sell it later, you will pay taxes on that gain. You also have to add any CCA recapture to your income.

You can defer the gains if you reinvest in replacement property relatively quickly. You need to make sure that you use the property for a similar purpose if you want to defer.

Written by Tom Drake

Tom Drake is the owner and head writer of Canadian Finance Blog. While you’re here, consider signing up for the RSS feed or email subscription. Both deliver the latest articles directly to you! You can also follow me on Twitter for all the latest posts or to send me any comments or questions!

7 Responses to Capital Cost Allowance: How to Calculate CCA Classes

  1. Hi Tom,

    Thanks a lot for this very informative blog article of yours. I learned more about CCA here in your blog, than any of the tax books I have read so far.

    You might want to check CCA for computers: just checked at the CRA website, to claim 100% for computers they want us to use Class 52 instead of Class 50.
    http://bit.ly/dogj2N

  2. Hello,

    I have a question, and perhaps you can help me to answer it.

    Last Dec.26th (Boxing day), I bought 3 home appliances (dryer, washer and stove) with mi current roommate. However, I’m moving out this summer and she told me she will discount me a 20% of depreciation, excluding the taxes. Is this fair?

    I’m really concerned about this issue, because I need the money;

    Thanks for your time,

    Sincerely,

    Kary

  3. I have a question about CCA for property values. It’s generally never stated anywhere about how you would determine the percentage of value associated with the land and the percentage associated with the property itself. I’ve searched but have not found any ‘rough guidelines’ or otherwise on the internet. I assume it is because “every situation is unique so you should pay an accountant to tell you the number”, but surely there are other ways to get this figure.

    Ever seen any posted?

Leave a reply

Notify me of followup comments via e-mail. You can also subscribe without commenting.

Headline Name: Email: subscribed: 0 We respect your privacy Email Marketingby GetResponse