Capital Cost Allowance (CCA) is the means by which Canadian businesses may claim depreciation expense for calculating taxable income under the Income Tax Act (Canada). Similar allowances are in effect for calculating taxable income for provincial purposes.
Capital property eligible for CCA excludes:[1]
CCA is calculated on undepreciated capital cost ("UCC"), which is generally defined as:
Where the UCC for a class is negative, a recapture of depreciation is deemed to take place, thus adding to taxable income and bringing the balance of UCC back to zero. Where UCC for a class is positive, but all assets with respect to that class have been disposed of, a terminal loss is deemed to take place, thus deducting from taxable income and bringing the balance of UCC back to zero.[2]
CCA itself is generally calculated using the following items:
CCA = capital cost allowance for the current fiscal period
UCC = undepreciated capital cost before claiming CCA in the current fiscal period
t = the proportion of days in the current fiscal period vs a normal fiscal period, if the current fiscal period is a stub, otherwise 1
d = the specified CCA rate with respect to the class
a = acquisition cost of the property in the current fiscal period
b = proceeds of disposition with respect to the property in the current fiscal period (but not greater than its original cost)
c = assistance received with respect to the property in the current fiscal period (net of any repayments made)
For assets subject to the full-year rule:
CCA=tdUCC
For assets subject to the half-year rule:
CCA=tdUCC-
| 1 | |
| 2 |
td\left(a-b-c\right)
Under the Income Tax Act:[5]
Part XI of the Income Tax Regulations provides for the calculation rules for CCA,[6] and Schedule II outlines the various classes of capital property that are eligible for it.[7] Special rules are in place to deem certain assets to be in separate classes, thus not becoming part of the general pool for the class.[8] Certain elections are available to taxpayers to transfer or reclassify assets from one class to another.[9]
Additional allowances are prescribed with respect to specified circumstances.[10] Specialized calculations for certain classes are also outlined in:
Part XVII of the Income Tax Regulations provides for specialized calculation rules for CCA with respect to capital property acquired for use in earning income from farming and fishing.[19]
CCA is calculated under the half-year rule, except where otherwise specified, with respect to the following classes.
| Class | Rate | Description |
|---|---|---|
| 1 | 4% | Buildings acquired after 1987 |
| 3 | 5% | Building acquired before 1988 |
| 7 | 15% | Canoes and boats (including their fittings, furniture and equipment) |
| 8 | 20% | Assets not included in other classes (common examples include furniture, equipment not used for manufacturing and processing, and tools costing more than $500) |
| 9 | 25% | Aircraft |
| 10 | 30% | Automobiles (including passenger vehicles costing less than $30,000, trucks, vans, etc. - but not taxis), computer equipment and systems software for that equipment |
| 10.1 | 30% | Passenger vehicles costing more than $30,000 (including taxes). Each vehicle must be kept in a separate class, and no terminal loss may be claimed. |
| 12[20] | 100% (full-year rule) |
|
| 100% (half-year rule)[21] [22] |
| |
| 13 | Original lease period plus one renewal period(Minimum 5 years and Maximum 40 years) | Improvements made to leased premises |
| 14 | Length of life of property (full-year rule) | Franchises, Concessions, Patents, and Licences |
| 17 | 8% | Parking lots |
| 29 | 50% straight-line (effectively allocated 25%-50%-25% over three years) | Eligible machinery and equipment used in Canada to manufacture and process goods for sale or lease, acquired after March 18, 2007, and before 2016 that would otherwise be included in Class 43. |
| 43 | 30% | Manufacturing and processing equipment not included in class 29 - may be kept in separate classes by filing an election |
| 44 | Patents acquired after April 26, 1993 | |
| 45 | 45% | Computer equipment and systems software acquired after March 22, 2004 and before March 19, 2007 |
| 46 | 30% | Data network equipment acquired after March 22, 2004 |
| 50 | 55% | Computer equipment and systems software acquired after March 18, 2007 |
| 52 | 100% (full-year rule) | Computer equipment and systems software acquired after January 27, 2009 and before February 2011. Only applies to new equipment used in Canada. |
Because assets subject to CCA are generally pooled by class, and CCA is generally calculated on a declining-balance basis, specific techniques have been developed to determine the net present after-tax value of such capital investments. For standard scenarios under the full-year rule and half-year rule models, the following standard items are employed:
I = Investment
d = CCA rate per year for tax purposes
t = rate of taxation
n = number of years
i = cost of capital, rate of interest, or minimum rate of return (whichever is most relevant)
More specialized analysis would need to be applied to:
Capital cost allowance will be calculated as follows:
| Year | Calculated CCA | |
|---|---|---|
| 1 | Id | |
| 2 | Id(1-d) | |
| 3 | Id(1-d)2 | |
| n | Id(1-d)n-1 |
Therefore, the Tax shield in year n =
Itd(1-d)n-1
Itd
| infty | |
| \sum | |
| n=1 |
| (1-d)n-1 | |
| (1+i)n |
As this is an example of a converging series for a geometric progression, this can be simplified further to become:
PV=
| Itd | |
| i+d |
The net present after-tax value of a capital investment then becomes:
I\left(1-
| td | |
| i+d |
\right)
For capital investments where CCA is calculated under the half-year rule, the CCA tax shield calculation is modified as follows:
\begin{align} PV&=
| 1 | |
| 2 |
\left(
| Itd | |
| i+d |
\right)+
| 1 | |
| 2 |
\left(
| Itd | |
| i+d |
\right)\left(
| 1 | |
| 1+i |
\right)\\ &=
| Itd | |
| i+d |
\left[
| 1 | |
| 2 |
+
| ||||
| 1+i |
\right]\\ &=
| Itd | |
| i+d |
\left[
| ||||||||
| 1+i |
\right]\\ &=\left(
| Itd | |
| i+d |
\right)\left(
| |||||
| 1+i |
\right)\\ \end{align}
Therefore, the net present after-tax value of a capital investment is determined to be:
I\left[1-\left(
| td | |
| i+d |
\right)\left(
| |||||
| 1+i |
\right)\right]
In cases where claims have been contested or disallowed by the Canada Revenue Agency, the Supreme Court of Canada has interpreted the Capital Cost Allowance in a fairly broad manner, allowing deductions on property which was owned for a very brief period of time,[23] and property which is leased back to the vendor from which it originated.[24] These decisions demonstrate the flexibility of the Capital Cost Allowance as a legal tax reduction strategy.