The rules for Capital Cost Allowance (CCA) are set by the Canada Revenue Agency (CRA). This applies to capital The rules for Capital Cost Allowance (CCA) are set by the Canada Revenue Agency (CRA). This applies to capital property like buildings, furniture or equipment that are used for your business. These things can become obsolete over time, and you can deduct their cost over a period of a few years.
Capital Cost and Rental Properties
When it comes to rental properties, claiming a capital cost allowance can be a little bit trickier. This is because the CCA is for depreciable property, and real estate can increase in value.
This doesn’t mean that you can’t claim capital cost allowance. It is one of the perks of owning rental property, along with writing off homeowners insurance, rental expenses, maintenance fees, advertising fees, mortgage interest, utility costs, as well as property management fees if you choose to go that route.
The CCA calculation is based on the type of rental property that you own and:
- The purchase price of the new building (not the cost of the land)
- Any legal, accounting, engineering, installation or any other fees that are directly related to buying/constructing the rental property (nothing land related)
- Any additions/improvements that haven’t already been claimed
- Any building interest fees, legal fees, accounting fees or property taxes that haven’t already been claimed
There are income tax regulations and different classes that are based on the property types that specify what you can claim and how much you can claim per year. These amounts are specified by the CRA (Canada Revenue Agency). They also specify that most land isn’t depreciable property, only the buildings are, since they can wear out over time.
Another thing to consider when claiming CCA on your rental property is whether the property is your primary residence or not. If it is, it can be complicated based on property value increases and capital gains. Before claiming any CCA on a rental property, it is a good idea to speak with a tax professional. This can help prevent mistakes and owing more money in the future.
Calculating Capital Cost Allowance
There are a few different ways to calculate your CCA deductions, but before you start getting into numbers, you want to group the depreciable properties you own into their appropriate classes that are deemed by the CRA. It is also important to keep in mind that when you start these calculations, they are based on the current tax year and not the calendar year.
Once you have separated the properties into classes, you add the amounts together and multiply the total by the rate for that class. This number is then what you are able to claim as CCA for the year.
Each year, you are only able to claim so much CCA, so you will have some that you are able to claim for the next tax year. This is known as UCC or Unclaimed Capital Cost or Undepreciated Capital Cost. You can claim every year until there is no UCC left.
The only year that is different when claiming CCA is the year that the property is purchased/acquired. For this year, you can only claim half of your net additions to a class. This is a provision of the Income Tax Act called the half-year rule (50% rule).
Capital Cost Allowance and Depreciation
Unlike other business expenses, you can’t use the cost of property as a tax deduction. What you can do, though, is deduct the depreciation. How the Capital Cost Allowance works is that you can keep deducting the depreciation value until there is none left or the property has been sold. Because of this, CCA and depreciation may seem like the same thing, but they are different. CCA is a tax deduction, and depreciation is an accounting practice.
How depreciation is calculated by an accountant is that they estimate the useful life of the asset and then use that estimate to depreciate the asset periodically. This process reflects the assets’ declining value over time. This value can then be used for tax purposes, known as Capital Cost Allowance.
Different Classes of Capital Cost Allowance
As we mentioned above, there are quite a few different CCA classes.
| Classes | Rates | Assets that Qualify |
| Class 1 | 4% | This applies to buildings acquired after 1987. |
| Class 8 | 20% | This applies to properties that don’t fall in any other categories.For Example: furniture, appliances, tools $500 or more |
| Class 10 | 30% | Computer hardware and software, motor vehicles, and some passenger vehicles |
| Class 10.1 | 30% | Passenger Vehicles $30,000 plus before taxes. |
| Class 14 | 100% | Patents, licenses and concessions for limited time periods. |
| Class 16 | 40% | Taxis and car rental vehicles. |
| Class 29 | Varies | Manufacturing and processing equipment for goods. |
| Class 44 | Varies | Patents and licenses for any time period. |
| Class 45 | 45% | Data processing equipment or computer hardware. |
| Class 46 | 30% | Data network infrastructure equipment and software. |
| Class 50 | 55% | Data processing equipment, software and ancillary data processing equipment. |
| Class 54 | 30% | Zero-emission vehicles that would be in class 10 or 10.1 |
| Class 55 | 40% | Zero-emission vehicles that would be in class 16. |
Some of these classes will be eligible for a first-year enhanced allowance under the accelerated investment incentive. This will be eligible for certain properties that are subject to the general CCA rules and don’t fall under classes 43.1,43.2, and 53.
Capital Cost Allowance For Vehicles
The rates you can claim for CCA on a vehicle are based on how much you paid for the vehicle and what it is being used for. Listed above are the classes that pertain to vehicles and the rate you can claim on your tax return. As long as the vehicle is being used for business purposes, you can claim this amount.
When it comes to Input Tax Credit (ITC) for vehicles you are claiming CCA on, if you use the vehicle for both commercial and non-commercial activities, only the part of the CCA used towards the commercial activities can be used to calculate the ITC.
Examples of Capital Cost Allowance
While we already know that rental properties minus the cost of land can be used for Cost Capital Allowance, business vehicles and vehicles that are rented out qualify as well. These aren’t the only things, though; there are a lot of things that fall into the CCA category, such as:
- furniture
- printers
- computers
- Telephones
- software licenses
Let’s go over a simple example of how to claim the CCA on one of these assets and what portion will be carried forward.
For example, let’s say you have a piece of furniture that falls under class 8 that was purchased for $500. Class 8 allows you to claim 20% as a Cost Capital Allowance.
500×0.2 = $100
This leaves you able to claim $100 with $400 in Unclaimed Capital Cost (UCC).
Claiming Capital Cost Allowance
Claiming the CCA is a great way to reduce the amount of taxes you pay every year. That being said, it is completely optional. You can choose not to claim it, claim part of it, claim one year and not the next, whatever makes the most sense for you and your tax deduction.
It is likely that it may not make sense to claim CCA. The thing about CCA is that it can’t be used to create a loss; it can only be used to bring your net income up to zero. In some cases, it may even disqualify you from other tax deductions if you use it. A tax professional will be able to help you decide whether claiming this is a good idea for you.
If you choose to claim the CCA, how and what you claim depends on whether you are employed, self-employed or have multiple assets or rental assets. In general, you calculate the CCA based on the cost of the asset and use the appropriate class rate. There are forms you fill out if you are doing the taxes yourself, or a tax professional can help to make this claim for you.
Benefits of Cost Capital Allowance
The Cost Capital Allowance allows you to reduce your taxable income by deducting any depreciation of long-term assets over several years. Some of the key benefits include:
- Significant Tax Savings: When it comes to your business, property acquired, as well as equipment acquired for your business, writing off their cost can help you save significant amounts of money on your income tax return.
- Improved Cash Flow: Using CCA allows you to spread your deductions over multiple years. This makes purchases of large business assets more affordable and helps to cover the property’s cost.
- Flexibility: When it comes to CCA, you don’t have to claim the maximum amount every year. You can claim as much as you want per year, and save amounts for when you have a low-income year or a large loss. This can help combat some of those costs.
- Help Replacing Assets: With depreciable assets for your business or professional activities, the CCA can help offset the costs of your business property.
- Specified Depreciation Rates: The CCA rate you can claim changes for certain assets. These allow for the appropriate depreciation rate of each asset.
Can Cost Capital Allowance Create a Business Loss?
For the most part, the Cost Capital Allowance can’t be used to make or increase a non-capital business loss. Generally, the CCA can only reduce your net income, and can’t take it below zero. However, there are some exceptions to this rule. An example of this would be selling an asset. In this case, a terminal loss can be claimed if the remaining undepreciated capital cost is higher than your proceeds.
When it comes to the Cost Capital Allowance, there are some exceptions. In the case that your business expenses exceed your revenue, then you’re unable to make a CCA claim. Since CCA amounts don’t have to be claimed, though, you can always forward them to another tax year.
Are Appliances Tax Deductible for Rental Property in Canada?
Since owning a rental property, even a non-residential building, is considered a business, you can claim the appliances on your tax return. However, you can’t claim the entire cost at once, but it can be claimed on a declining balance basis. With such property, you can claim any repairs to appliances in full in the year that they’re incurred. This is because these are considered to be current operating expenses.
With expenses, though, you need to consider both the half-year rule and the full-year rule. In the year that you purchase the appliance, you can only apply 50% of the CCA for that year. You can claim the full amount using the full-year rule in the following year.
Claiming Your Computer as a Tax Deduction in Canada
While you can’t claim a computer that you use for personal use, you can claim equipment and system software. Software for that equipment is also eligible since it’s needed to run your business. However, they are in separate classes, but are both necessary for producing income.
If the computer that you’re using is for both business use and personal use, then you have to prorate the deduction. When it comes to the classes that you can claim, computers, laptops and printers are considered class 50, whereas software can be claimed in class 12. This includes digital video disks and can be claimed at 100%.
Claiming Vehicle Repairs on Your Taxes
When it comes to claiming vehicle expenses, this can only be done if your vehicle is used to earn business, employment or rental income. You must also keep a detailed logbook of all of your travel time and kilometres. You also need all of your receipts to keep track of your repairs and gas used.
Only the percentage of repairs related to your business can be claimed. This will be calculated based on your receipts. Other costs that you can deduct from your vehicle are insurance, license, registration, tires, oil changes, fuel, and capital cost allowance.
Other Things You Can Claim Using the Cost Capital Allowance
When it comes to the Capital Cost Allowance, what you can claim is based on the type of business you have. You can claim:
- Medical or dental instruments
- Equipment used to process goods
- Other eligible machinery
- Tools costing over a certain amount
- Automotive equipment
- Appliances for residential and non-residential purposes
- New equipment for professional activities
- Timber limits
There are even some CCCA-eligible expenses that also qualify for additional allowances. These include:
- Eligible non-residential buildings that were acquired after March 18, 2007, get an additional 6%
- Property available for use before 2028 (the half-year rule is suspended)
- Certain clean energy equipment can be written off faster
- Zero-emission vehicle acquired after March 18, 2019, can claim accelerated CCA rates
- Other eligible non-residential buildings acquire an additional 2% allowance
Other Things to Consider
When it comes to Capital Cost Allowance, some costs wouldn’t qualify and are instead considered to be fully deductible. These can be things like small tools and kitchen utensils. For larger items that do qualify, when you calculate CCA, the remaining balance can be used towards future years.
Depending on what you’re claiming, some items can be in the same class and have special rules. Since the Supreme Court has interpreted the CCA broadly, meaning that as long as they were used to earn income, they can be claimed even if you only owned them for a short period of time.
Overview
If you have rental properties, rental assets or are self-employed, there are certain instances where claiming the CCA would make sense for you. How and what you can claim for Cost Capital Allowance depends on the asset, when it was acquired and how long you have had the asset.
You can keep claiming the UCC until there is no depreciation value left or you have sold the asset. Selling the asset but claiming CCA will also affect the tax benefits it has for you if they are in the same tax year.
It is important to remember that, while you can claim the depreciation value of a building, you can’t claim land. When calculating the CCA, the value of the land is deduced before the calculations are made. That is, if you choose to claim the CCA. Unlike other tax deductions, the CCA can’t be used to create a loss; it can only be used to bring your net to $0.
Because of this, in some instances, it may not make sense to claim the CCA. The nice thing about this is that it isn’t mandatory. You can choose whether or not to claim it based on your individual situation. The CCA is a great tax deduction tool, but only if it benefits you. If you aren’t sure if this deduction is a good option for you, it is best to discuss it with a tax professional.
