When you begin claiming business expenses, it's important to understand the difference between an immediate expense, which is fully deductible in the year that you incur it, and a depreciable expense, which is deducted over time.
With regular business expenses, you can claim the full amount in the year the expense happened. However, you need to be aware that some expenses are depreciable. These are costs that, while also part of the expenses used to calculate net income (or loss), are subject to Capital Cost Allowance rules.
What is Capital Cost Allowance?
Capital Cost Allowance is a set of rates stating the amount you can claim each year on a depreciable property used for business activities. In the first year, you can only claim based on half the amount you paid. This rule is in place because if you acquired the equipment during the year, there is not a full year of depreciation.
How to Calculate CCA
Below is an illustration of how you use CCA to deduct equipment for your business. Say you bought a desk for $500. This falls under CCA’s Class 8, “Other Property”. Class 8 has a rate of 20%.
- First Year $250 (half of $500) x 20% = $50 expense claim. This leaves a value of $450 next year.
- Second Year $450 x 20% = $90 expense claim. This leaves a value of $360 next year.
- Third Year $360 x 20% = $72 expense claim. This leaves a value of $288 next year.
- You continue depreciating the desk this way until you are at $0
These calculations are done in Area A and Area B on page 4 of the T2125 form. It's important to understand what class the equipment falls into, so that you can properly depreciate your equipment.
CCA Classes for Home Businesses
If you have a home business, the following four classes would likely be of the most interest to you:
- Computer equipment and systems software: Class 50 (55%)
- Data Network Equipment: Class 46 (30%)
- Small tools ($500 limit): Class 12 (100%)
- Other Property (furniture, appliances, fixtures, machinery, and equipment): Class 8 (20%)
You can find all the CRA's CCA classes on their website.
As the claimable part is calculated with expenses, this is another case where you can claim expenses that exceed your business income.
What If You Receive Government Help?
It's also important to understand how the Capital Cost Allowance works in conjunction with help from the government. In some cases, you might receive a business grant or a subsidy to help you buy equipment for your business. You will need to subtract the amount of the grant from the capital cost. Make the subtraction before you perform your depreciation calculations.
In our example above, if you receive a $200 subsidy to help you purchase that desk, you will start out with a capital cost of $300, rather than $500. That will change how much you can claim for depreciation over all. However, since you didn't have to pay the entire amount for the desk on your own, it tends to even out.
It's also possible to receive an input tax credit if you paid GST/HST on some of the depreciable property you bought for use in your business. This can provide you with a little extra help come tax time, so that you aren't losing ground to other taxes on your capital costs.
Deferring Capital Gains or CCA Recapture
If you decide to depreciate your capital costs, you will also have to pay taxes on capital gains. If your capital property actually gains in value, and you receive more back than you paid for it when you sell it later, you will pay taxes on that gain. You also have to add any CCA recapture to your income.
You can defer the gains if you reinvest in replacement property relatively quickly. You need to make sure that you use the property for a similar purpose if you want to defer.