It is much easier to understand the calculation of capital cost allowance (CCA) through an example.
ABC Inc. started business on October 20, 2010. The year end was set at December 31. Equipment were purchased on November 4 for $45,000. The transportation cost $4,000 and the installation fee was $1,000.
What is the maximum CCA for its equipment that ABC Inc. could deduct for taxation year 2010?
The equipment is in class 8 and CCA rate for class 8 is 20%.
The capital cost of the asset is $50,000 (purchase price $45,000 + transportation $4,000 + installation $1,000).
50% of addition = 50% of $50,000 = $25,000 (half-year rule)
CCA before prorated = 20% * $25,000 = $5,000
The taxation year is less than 365 days, allowable CCA must be prorated by the number of days in taxation year divided by 365.
Maximum allowable CCA = $5,000 * 73/365 = $1,000
The key points in this example:
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- Half-year rule
- Taxation year is less than 365 days