How to deduct business capital expenditures – capital cost allowance

The money you spend on purchasing capital assets for your business is capital expenditure. Unlike the day-to-day expenditures such as telephone bills, office stationery,  rent, or car lease, a capital expenditure cannot be fully deducted immediately as a business expense. It can only be deducted over time in a form of depreciation. In stead of using the term “depreciation”, the tax department calls it Capital Cost Allowance or CCA.

Capital Cost Allowance (CCA)

Common examples of capital assets are office furniture, machinery, equipments, computers, automobiles, and buildings. A capital asset has an expected useful life that will extend beyond the end of the taxation year. That is why you cannot take a full deduction for a capital expenditure in one year. However, you are allowed to deduct a “portion” of the cost of a capital asset for each year during the life of the capital asset. The calculation of the deductible portion is specified in the rules for Capital Cost Allowance (CCA).

How to calculate capital cost allowance (CCA)

Capital cost allowance was calculated by depreciating the cost of the assets at certain rate. This is also called declining balance method of depreciation. Different classes of assets are set up and a CCA rate is assigned to each class. For example, when you buy a few computer desks and chairs, they will be grouped in class 8, office equipment and furniture, and can be depreciated at a rate of 20% per year. To prevent anyone from taking advantage by depreciating assets too quickly to defer taxes, the government dictates which class a specific asset goes into and the percentage rate used to calculate the CCA for each class. Here is an example about how to calculate CCA.

Tax tip:

You don’t have to claim full CCA each year, so you may want to delay claiming CCA your income is low or your business is losing money.

Additional information