Capital Cost Allowance (CCA) – What is Tax Depreciation?

Tax Depreciation

As a business proprietor, you’re probably familiar with the array of tax advantages. Beyond the primary benefit of deducting expenditures from your earnings, another valuable avenue exists: claiming tax deductions for depreciation. This tax advantage is called Capital Cost Allowance, abbreviated as CCA.

In 2021, Canadian businesses claimed CCA deductions of $124.8 billion. This was an increase of 10.4% from 2020. 

When your business possesses depreciable assets like buildings, vehicles, or equipment, their value gradually diminishes over time – a phenomenon recognized as depreciation in accounting terms. 

However, the tax code extends the opportunity also to derive a deduction based on this depreciation.
For certain assets, the tax laws in Canada do not allow you to fully deduct the purchase cost in the year of acquisition. The Income Tax Act refers to these expenditures as capital outlays and classifies them as capital assets. 

Definitions of Capital Cost Allowance (CCA)

Capital Cost Allowance (CCA) is a tax provision designed for the depreciation of depreciable assets. When you procure an asset, such as a vehicle, building, or software, its value gradually erodes or may become outdated. 

While owning such assets brings advantages, it also entails inherent ownership risks. Acknowledging this dynamic, the Canada Revenue Agency (CRA) permits you to claim CCA as a deduction in recognition of these factors.

Capital assets would include computers, automobiles, furniture, buildings, etc.  Expenses incurred for capital assets differ in nature from operating expenses such as advertising, supplies and rent because capital assets are generally held and used over longer periods.  An automobile, for instance, would likely be used in your business over several years.

For this reason, the tax laws in Canada allow you to claim a deduction for a prescribed portion of the asset’s cost each year it is used in your business.  This deduction is called depreciation or capital cost allowance (CCA) for income tax purposes.  

Each asset is added to a class, and CCA is calculated on a declining basis based on the percentage assigned to that class and the undepreciated cost of the asset in that year.  

For instance, an automobile purchased for $20,000 would be included in Class 10 at a rate of 30%.  

In year 1 and 2, $6,000 and $4,200 would be deducted, respectively 

Year 1 20,000 X 30% = $6,000, Y2 (20,000 – $6,000) X 30% = $4,200.  

The remaining undepreciated cost of $9,800 (20,000 – 6,000 – 4,200) would be deducted until the asset is reduced to zero or disposed of.

How to Calculate Capital Cost Allowance

Capital Cost Allowance (CCA) – What is Tax Depreciation?

Calculating CCA might appear complex, given the various considerations involved. If you’re seeking clarity on determining the eligible capital allowance, fret not. Below, we summarise the steps for calculating CCA and provide illustrative examples.

  • Opening Balance: Begin with the opening balance at the start of the year, also called the Undepreciated Capital Cost (UCC).
  • Additions: Account for any additions to the current year’s asset class.
  • CCA Half-Year Rule: Calculate 50% of the additions as per the half-year rule.
  • Dispositions: Factor in the amount received from asset disposals.
  • The base for CCA: Compute the base for CCA using the formula

Opening balance + Additions – Half-year rule – Dispositions.

  • CCA Rate: Utilize the prescribed CCA rate for the specific asset class.
  • CCA Deduction: Calculate the CCA deduction as follows: Base for CCA x CCA rate.
  • Ending Balance: Determine the closing balance by subtracting the CCA deduction from the opening balance.

For years, when you dispose of an asset, employ the subsequent CCA formula. If multiple assets are part of the same class, the earlier calculator remains applicable. 

The formula below is specifically for situations where you are closing the entire class.

  • Opening Balance: Commence with the opening balance, denoted as the Undepreciated Capital Cost (UCC).
  • Dispositions: Consider the amount received from asset disposals.
  • Recapture or Terminal Loss: Compute the difference between the opening balance and dispositions.

If the outcome is negative, it signifies a recapture, which must be reported as income. Conversely, if the positive result indicates a terminal loss, it should be reported as a loss on your tax return.

Capital Cost Allowance (CCA) – What is Tax Depreciation?

CCA vs Depreciation

CCA and depreciation are closely related concepts, although they possess distinct characteristics. 

Capital Cost Allowance (CCA) represents a tax deduction, whereas depreciation is an accounting practice. Essentially, CCA corresponds to the accounting term “depreciation.”

The utilization of CCA deductions adheres to regulations established by the Canada Revenue Agency (CRA), predominantly guided by CRA CCA classes. These regulations dictate the permissible deduction amounts.

In contrast, depreciation involves accountants estimating an asset’s anticipated useful life and spreading its value decrease across periodic intervals according to that projection. 

Depreciation accurately mirrors an asset’s diminishing value on the financial records. Moreover, various depreciation methodologies are available within Canadian accounting, allowing accountants the discretion to choose the most suitable approach.

For the sake of simplicity, CCA and depreciation often align. Many accountants opt to depreciate assets in alignment with CCA guidelines, streamlining the tax filing process

This strategy minimizes administrative complexities since only one calculation needs to be tracked instead of managing two separate calculations. Nonetheless, this approach doesn’t necessarily guarantee that the recorded depreciation always precisely corresponds to an asset’s true useful life.

What is Undepreciated Capital Cost (UCC)?

You might encounter the acronym UCC in the context of taxation. Undepreciated Capital Cost refers to the portion of an asset’s value that remains unclaimed for Capital Cost Allowance (CCA) deductions. In simpler terms, it signifies the starting balance used at the beginning of a fiscal year to compute CCA.

Special Regulations

Curious about the half-year rule for CCA? It’s a great question! When you acquire an asset within a year, you can deduct only half of the eligible CCA for that year. This is commonly referred to as the half-year rule or the 50% rule.

Then there’s the “available for use” rule. This guideline stipulates that CCA can only be claimed once the asset is prepared for utilization. 

Suppose you procure a property that requires renovation; until those renovations are complete, the property isn’t considered ready for use. Only after the renovations are finished would it be deemed available for use.

Lastly, in the year of asset disposal, you’ll encounter recapture or terminal loss. These terms are employed in CCA tax scenarios to denote gains or losses. In essence, if you realize a profit from selling an asset, you’d face recapture, leading to additional income on your tax return. 

Conversely, if the sale results in a loss, you’d incur a terminal loss, a deduction on your tax return.

Capital Cost Allowance (CCA) Tips

Tax Tip: Not claiming CCA to offset non-capital losses. For example, if you have non-capital losses of $10,000 and CCA of $5,000, you may want to only claim $5,000 of CCA in 2023. This will allow you to offset your taxable income from the non-capital losses.

Tax Tip: Avoiding recapture on the disposition of assets. For example, if you sell a piece of equipment for $12,000 that you had claimed CCA on, you will have a recaptured gain of $2,000. This is because the disposition value of the equipment ($12,000) exceeds the undepreciated cost of the equipment ($10,000).

Tax Tip: Claiming CCA on appreciating assets. For example, if you buy a piece of land for $10,000 and expect it to be appreciated, you may want to not claim CCA on the land. This is because the gain on the disposition of the land would be taxed at a lower rate if treated as a capital gain.

Tax Tip: In the first year the asset is acquired, only ½ of the CCA can be claimed.  If you plan on purchasing assets early in the next business year, you should consider expediting the purchase before the year-end to claim ½ of the CCA in the current year and the full CCA deduction in the next year.

Tax Tip: CCA is a permissive deduction, meaning you can claim any amount up to the maximum prescribed limit for the year.  If you have non-capital losses, it may be advantageous not to claim CCA until all non-capital losses have been claimed. The reason is that non-capital losses expire after a defined carry-forward period, whereas CCA has no limitation and can be carried forward indefinitely.

Tax Tip: Generally, on asset disposition, a deductible loss (terminal loss) would occur if the undepreciated cost exceeds the disposition value.  If the disposition value exceeds the undepreciated cost, a taxable gain (recapture) would be recognized.  

In certain circumstances where you expect the asset to appreciate and may consider selling it in the near term, it may be beneficial not to claim CCA to avoid the gain on recapture, which would be 100% taxable. In this situation, the appreciation in value over the original purchase price at the time of sale would be a capital gain and would only be taxed at 50%.

CCA Considerations in 2023

  • The CCA rates for certain types of property have changed. The CRA has announced changes to the CCA rates for certain property types in 2023. 

These changes will affect the amount of CCA that businesses can claim. 

For example, the CCA rate for machinery and equipment has been reduced from 20% to 15%.

  • New CCA classes have been created. The CRA has created new CCA classes for certain types of property, such as electric vehicles and machinery. These new classes can provide businesses with more flexibility in claiming CCA deductions. 

For example, the CCA class for electric vehicles has been set at 50%.

  • The half-year rule has been changed. The half-year rule has been changed so that it now applies to all property, regardless of when it is acquired during the year. 

This means businesses can only claim half of the CCA rate in the year the property is acquired.

  • The accelerated investment incentive has been extended. The accelerated investment incentive is a temporary measure that allows businesses to claim a higher CCA rate on certain property types, such as machinery and equipment. 

This incentive has been extended for one more year, so businesses can claim a CCA rate of 30% on these types of property in 2023.


What are the CCA classes?

The CCA classes are a system the government uses to classify depreciable property. There are 10 CCA classes, each with its own CCA rate. The CCA rate is the percentage of the asset’s cost that can be deducted each year.

  1. Buildings (4%)
  2. Land improvements (2%)
  3. Machinery and equipment (20%)
  4. Vehicles (30%)
  5. Ships, boats, and aircraft (20%)
  6. Furniture and fixtures (10%)
  7. Information technology equipment (30%)
  8. Industrial buildings (4%)
  9. Mineral exploration and evaluation property (25%)
  10. Renewable energy properties (50%)
2. What are the risks of claiming CCA?

Here are some of the risks of claiming CCA:

  • Recapture: If the asset is disposed of for more than its undepreciated cost, the business may have to pay tax on the gain. This is called recapture.
  • Timing: The timing of CCA deductions can affect the amount of tax that a business pays. For example, if a business claims CCA in a year when it has a lot of other deductions, it may not benefit as much from the deduction.
  • Complexity: The calculation of CCA can be complex, and businesses may need to hire a tax advisor to help them.
  • Errors: If a business makes a mistake in calculating CCA, it could be subject to penalties from the CRA.
3. What is the half-year rule?

The half-year rule is a rule that applies to the calculation of CCA. It states that you can only claim half of the CCA rate in the year that you acquire an asset. This is because the government considers that you have only used the asset for half of the year in the year of acquisition.

For example, if you acquire an asset on January 1, 2023, you can only claim 1/2 of the CCA rate for 2023. You would then claim the full CCA rate for 2024 and subsequent years.

There are a few exceptions to the half-year rule. For example, the rule does not apply to assets acquired in the last 3 months of the year. In this case, you can claim the full CCA rate for the year of acquisition.

4. What is the accelerated investment incentive?

The accelerated investment incentive is a temporary measure that allows businesses to claim a higher CCA rate on certain types of property, such as machinery and equipment. This incentive can help businesses recover the cost of these assets more quickly.

The accelerated investment incentive is available for assets that are acquired between January 1, 2022 and December 31, 2023. The higher CCA rate is 30% for machinery and equipment, and 50% for electric vehicles.

The accelerated investment incentive is a valuable tax break for businesses that are investing in new equipment. It can help businesses save money on taxes and improve their bottom line.

5. What are the different methods of calculating depreciation?

There are several different methods of calculating depreciation, including the straight-line method, the declining-balance method, and the sum-of-years’-digits method. The method used will depend on the type of asset and the business’s financial situation.

The straight-line method is the simplest method of calculating depreciation. It involves depreciating the asset over its useful life in equal installments.

The declining-balance method is a more accelerated method of depreciation. It involves depreciating the asset at a higher rate in the early years of its life and at a lower rate later.

The sum-of-years’-digits method is a method that takes into account the asset’s useful life. It involves depreciating the asset at a rate that is proportional to the number of years of remaining useful life.

The best method of calculating depreciation will depend on the asset and the business circumstances. It is important to consult with a tax advisor to determine the best method for your situation.

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