How Capital Cost Allowance Works (CCA)
I’ve brushed on Capital Cost Allowance (CCA) before when discussing rental property tax deductions and the CCA schedule for the purchase of a computer in 2009. However, as it can be a fairly complicated topic, I thought I would write a primer and explain the basics of CCA.
Capital Cost Allowance is basically the fancy tax term for claiming the depreciation of a business asset. Some expenses purchased under a business, like advertising, can be considered a current expense and can be claimed in the current tax year. Other expenses, like equipment, must be claimed as a capital expense and depreciated over a set schedule defined by the government. The depreciated amount of the equipment is claimed every year.
According to the governments economics division, the more formal definition of capital cost allowance is:
The cost of depreciable assets, such as buildings, furniture and equipment, acquired for use in business or professional activities cannot be deducted as an upfront expense when calculating net income for tax purposes. In recognition, however, of the fact that these assets wear out or become obsolete over time and are replaced, the federal government created the capital cost allowance (CCA). The CCA is a non-refundable tax deduction that reduces taxes owed by permitting the cost of business-related assets to be deducted from income over a prescribed number of years.
Rental Property/Business
For rental properties, the building itself can be depreciated via capital cost allowance. The downside of claiming CCA on the building itself is that the investor will have to pay it back once the building is sold. It is generally recommended that CCA is NOT claimed on the building itself, however, you would have to contact a tax pro for your individual situation.
A common question about rental properties is if upgrades or repairs made to the property will count as a current expense or a capital expense. Generally speaking, if the expense was made to “upgrade” the property, then it should be claimed under the appropriate CCA schedule. For example, if appliances (class 8 – 20%) were purchased for the rental, then it would have to be depreciated accordingly every year. However, if the expense was more of a “repair”, such as if the existing refrigerator was broken and someone was hired to fix it, then it can be claimed as a current expense.
Another example is from a reader, he asked if he were to build a fence on a rental property if he could claim it that year. Under that circumstance, the addition of the fence should be considered a capital expense and depreciated every year. However, if he were to repair an existing fence, I think it would lean towards being a current expense.
The same rules apply for businesses. That is, if you purchase a piece of equipment for the business, then it’s most likely to be considered a capital expense.
What are the CCA Rates?
Here is more detailed information about rental properties, CCA classes and and taxation straight from CRA. (here is a nifty CCA table)
How to Calculate CCA
Calculating CCA is fairly straight forward but each category of capital expense has it’s own rate schedule as defined by CRA. What do you do with the rate given? There are two methods:
Declining Balance Method
This method is the most commonly used for most asset classes and is fairly simple to calculate. Note that in the first year, only half the normal CCA rate can be claimed.
Lets go back to our refrigerator example which is class 8 with a 20% cca rate. Lets say that the fridge was $1000 out of pocket.
| Year | Capital Cost | Capital Cost Allowance (amt to claim) |
| 1 | $1,000 | $100 (only 1/2 of 20% in first year) |
| 2 | $900 | $180 |
| 3 | $720 | $144 |
| 4 | $576 | $115.20 |
| 5 | 460.80 | 92.16 |
| 6 | $368.64 | $73.73 |
| 7 | $294.91 | $58.98 |
| 8 | $235.93 | $47.19 |
| 9 | $188.74 | $37.75 |
| 10 | $150.99 | $30.20 |
Straight Line Method
The straight line method is more specific to the asset and is defined by CRA. Using this calculation, the asset is depreciated by a set dollar amount, instead of a percentage, every year.
Final Thoughts
I realize that this tax topic can be a little on the dry side, but it’s important for landlords and business owners alike. The reason being is that not all expenses are treated the same. Some expenses can be counted as a current expense but others are capital expenses and need to be depreciated over time.
It’s important to note that this article is meant to be a primer on capital cost allowance. Any detailed information about your particular situation can be pulled from the CRA site directly or from contacting an accountant.
28 Comments, Comment or Ping
1. Archanfel
Not sure why CCA should not be claimed. The claim would reduce tax by the marginal rate whereas capital gain are only taxed at 50%, right? For example, say the house is worth $100,000. Over if I deduct $10,000 a year (hypothetically), I would get $40000 tax refund over 10 years based on a 40% marginal rate. When I sell the house for $120,000 after the 10th year, I would pay capital gain taxes on $120,000 (since the cost was reduced to zero), $60,000 at 40% is only $24000. Also, if I sell the house after I retire, my marginal rate is probably lower, not to mention the compound growth of my tax refunds.
Am I missing something? Would the CRA ask me to return all tax refund + interest + penalty if I over depreciated the house?
Mar 18th, 2009 @ 8:55 am
2. john
Thats not quite right.
When you sell your property it causes CCA recapture. So in the example above you pay full tax rate on the 100k and capital gains on the 20k. What you could do is claim the CCA each year use the tax refund to prepay your mortgage. When the house is sold use the money to pay off the mortgage and the tax bill. This way your saving the interest on the tax refunds.
All that being said you’re only allowed too claim 4% per year on buildings and you can’t claim anything on the land. so the benefit is very small.
Mar 18th, 2009 @ 11:05 am
3. nobleea
ok, here’s a scenario for you.
i’ve changed a condo i used to live in as primary residence to an income producing rental. I don’t expect to keep it very long, maybe another year. I changed the designation (to rental) at a time when house prices were high. I expect to be in a capital loss position when I sell it.
I assume claiming CCA would be wise in this position, since I wouldn’t have a capital gain, and a capital loss would only be applicable against capital gains?
Mar 18th, 2009 @ 11:16 am
4. mjw2005
You must be doing your taxes right now FT….As I am as well, I am self-employed, and CCA is one of the reason why I go to a pro for my taxes….just a nightmare to keep track of all the values for CCA
Wish there was an easier system….
Mar 18th, 2009 @ 12:30 pm
5. Elbyron
Though it doesn’t seem to show up in the “Related Posts” section, there was much discussion of CCA in the article “Rental Property Income Taxes and Deductions” (http://www.milliondollarjourney.com/rental-property-income-taxes-and-deductions.htm). In comment #58, I gave my opinion: “if you’re in a low tax bracket or you plan to sell the property soon, you might not want to claim CCA. This is because in the year you dispose of rental property, you may have to add an amount to your income as a recapture of CCA”. Also see comment #5 in that article for suggestions on when to claim CCA.
I’m interested to hear what others think about when to claim or when not to claim CCA deductions…
Mar 18th, 2009 @ 1:10 pm
6. elman
How about a situation where you buy a really old house and rent it out. claim CCA and then when asset = 0 you tore it down and build a new house and sell it. How will you get taxed in that situation ?
Mar 18th, 2009 @ 4:17 pm
7. Sampson
I’m in a somewhat similar situation to nobleea, regarding appraised market value at the time I began renting.
With respect the claiming CCA against the building – I see from the CRA link that 5% can be claimed annually. My questions is what happens when you reach 100% – presumably many people will hold their rental properties longer than 20 years. So is the 5% based on the original purchase/assessed value, or will this float with the actual value of the property?
Mar 18th, 2009 @ 5:21 pm
8. Ray Sanchez
Wow! This was a pretty in-depth article. Thanks for the useful information and taking the time to write this. :)
Mar 18th, 2009 @ 5:24 pm
9. Elbyron
Sampson,
Take a look at the chart in the declining balance section. Notice that you deduct 20% based on the remaining value (previous year’s capital cost), not 20% of the original value. So the deductions will get smaller and smaller but the remaining capital cost will not actually reach zero.
I’m not sure which asset classes use the straight line method (which could drop the capital cost to zero), but rental property always uses the declining balance method.
Mar 18th, 2009 @ 5:44 pm
10. Ed Rempel
Hi nobleea,
In your situation, it sounds like CCA would be wise, since it is a full deduction vs. only a part deduction for a capital loss.
If you have not bought a new home and there is doubt as to how long you will hold the condo, you can elect to have your former residence temporarily maintained as an principal residence for up to 4 years.
Ed
Mar 19th, 2009 @ 12:18 am
11. Ed Rempel
Hi elman,
The capital cost will never reach zero, as Elbyron said. If you tear down and build a new house, it will be a terminal loss on the old building and the cost of building will be the cost of the new building.
For buiildings, each one is a separate asset, and the land is a separate, non-depreciable asset.
Ed
Mar 19th, 2009 @ 12:26 am
12. Ed Rempel
Hi Elbyron,
The best example of an asset for straight-line depreciation would be leasehold improvements. If a tenant has a 5-year leave and spends $50,000 improving their unit (common in commercial leases), then the tenant can claim $10,000/year.
Landlords sometimes claim leasehold improvements as well, if done for a specific tenant.
Most of the time, CCA is good to claim, but you cannot claim it unless you have a rental profit. You cannot create or increase a rental loss with CCA.
The one time you should never claim CCA is if you rent out a part of your home. If you claim any CCA, use lose the principal residence designation and may have to pay capital gains tax plus CCA recapture when you sell your home.
Ed
Mar 19th, 2009 @ 12:34 am
13. CanadianFinance
I believe the only CCA that will apply to me is Class 50 – Computer Equipment… and thankfully that’s 100% for almost 2 years.
Mar 19th, 2009 @ 2:37 pm
14. Ms Save Money
Does anyone know if the US system is in any way similar to the Canadian system?
Mar 19th, 2009 @ 6:16 pm
15. Ms Save Money
Ohh and I forgot to add – If I didn’t claim CCA at first, can i do it in the second / third / etc. year since I acquired the asset?
Mar 19th, 2009 @ 6:20 pm
16. Elbyron
You can begin claiming CCA anytime, but your “deduction room” does not accumulate like in an RRSP, so you can’t claim any deductions on depreciation for previous years. If you really wanted to get those deductions, you might be able to re-file your tax return for a prior year.
Don’t forget that claiming CCA on a property can come with a hefty penalty when you sell it. If the property has increased in value, then in addition to paying capital gains tax (50% of the gain is added to your income), you will have to pay back 100% of the CCA deductions. All this is added to your income in a single year, which might push you into a higher tax bracket (assuming you’re not already in the highest). So while you can get the deductions each year at your current marginal rate, you might have to pay them back at a higher rate! Now lets say you did something smart with the deductions each year, like paying down your mortgage or making good investments. If you sell the property in 10 years, the savings/earnings that you accumulate could very easily exceed the penalty incurred upon sale. That is why I stated earlier that CCA may be bad if you’re selling soon. Claiming CCA may also be bad if you currently have a low marginal rate (deduction isn’t worth as much) or if you spend the deduction instead of investing it.
Mar 20th, 2009 @ 12:04 pm
17. TStrump
Great explanation.
I’m an accountant and this was very easy to understand.
Mar 20th, 2009 @ 4:14 pm
18. Michele
Help!
I own a condo I bought in 2007. In 2008 I started creating a small business that I will be running out of my condo. I have some business expenses but as of yet, I do not have any income/sales from it.
Do I put my condo as a Capitol Cost Allowance?
If so, how do I do it?
Thank you!
Apr 4th, 2009 @ 4:22 pm
19. Ed Rempel
Hi Michele,
You can lose the tax-free status of your principal residence if you claim CCA on it. It sounds like this condo is your home, so you should not claim CCA.
It might be possible on specific “leasehold improvements”, if you can clearly idenditfy specific renovations just for your business, but otherwise, you should avoid CCA on your principal residence.
Ed
Apr 5th, 2009 @ 11:31 am
20. MA
I installed eavestroughing and an air conditioner last year for my rental unit. How do I claim these expenses? What class/percentage do I use for CCA?
Any help is appreciated.
MA
Apr 6th, 2009 @ 10:49 am
21. Brennan
Ed Rempel,
Thanks for the great post on CCA. When you say in your Post 12 that “The one time you should never claim CCA is if you rent out a part of your home.” you are referring solely to claiming CCA for my home…correct? Claiming CCA for equipment and computers purchased (Class 8 & 45 respectively) will not affect my Principal Residence designation….correct?
Apr 30th, 2009 @ 2:03 am
22. JC
Great write-up thank you!
I have a few follow up questions.
I recently purchased my primary residence and it has an attached rental suite which came with kitchen appliances and shared laundry.
1- When claiming CAA, is it “all or nothing”? For example, if possible is there a time when it would beneficial to claim appliances and fixtures as CAA but not the building? Would that avoid gains penalties on the house when sold?
2- The acquired laundry equipment was in rough shape (not economical to repair) and was replaced with new. Should this be considered a capital cost or repair and deducted as an expense? (The equipment is used by both the tenant and us).
3- Are tools purchased for the repair and maintenance considered a capitol cost or a deductible expense? Hand tools, lawn equipment, ladders ect…
Please forgive my current ignorance on this subject.
Dec 29th, 2009 @ 6:55 pm
23. FrugalTrader
JC, my understanding is that equipment and the building are treated as separate entities. You would need to check with a tax pro about the other 2 questions.
Dec 29th, 2009 @ 8:02 pm
24. JC
I often hear that claiming CCA on a rental suite can cause an owner to lose the “principle residence” status of a home and so if one rents a portion of their home they should not claim CAA.
On the other hand, my interpretation (which is very likely flawed) of CRA documents is that the moment I rent out a portion of my house, I lose “principle residence” status on that portion of the property anyway regardless of any claim of CCA. Is this interpretation true?
I am most entirely confused on the subject of “principle residence” status. I have looked high and low for strategic information on this subject but resources remain elusive. I’m hopeful that you can shed some light on this subject.
Jan 4th, 2010 @ 2:03 am
25. Ed Rempel
Hi JC,
You are allowed to declare one property as your principal residence. If the main purpose of owning that property is to be your residence, then you can rent out part of it and still claim it all as a principal residence.
Ed
Jan 24th, 2010 @ 1:16 am
26. Charlie
My question relates to motor vehicle allowance area of CCA. I am familiar with what to do if you purchase a car in 2009 and start using it for rental income right away (2009). What do I put in the columns for CCA if I purchased my car in 2006 for $24000, but did not purchase my first income property until Oct 2009? There are many paragraphs devoted to change from personal to business use for property/home office but not for vehicles so not sure if I should be treating the car the same way.
Jan 25th, 2010 @ 12:46 am
27. Eva
Marvelous job Ed, answering people’s questions about this confusing topic.
Now my question is, I am filling out T776 (statement of real estate rentals) and in area A-Calulation of Capital Cost Allowance Claim…do i need to put anything in that area? Previous accountants put the entire cost of our rental townhome in the UCC Start of The Year box and that same amount in the UCC End of Year box. If I am not claiming CCA, i simply enter that same amount this year??? And do i do this each year that i own the rental property until i sell it?
Thank you in advance.
Feb 4th, 2010 @ 1:16 am
28. Ed Rempel
Hi Eva,
Basically, you are right. If you are not claiming CCA and you owned the property before last year, just enter the class of the building and then put in the UCC carried forward from last year and show the same figure as the end of year. In software, you may have to override the CCA calculated.
The key thing here is that the asset is the building – not the land. They must be 2 separate assets. You can only claim depreciation on the building – not the land. So you may have to figure a reasonable split between land and building, which is often done based on the proportion used on your property tax. An objective measure is better than a subjective measure.
For a townhouse, assuming the entire value is the building is probably reasonable, unless it is a freehold townhouse. Usually, you don’t actually own any of the land, so it may be reasonable to assume that 100% of the cost is the building.
Many people do not claim CCA because it will be recaptured when you sell. Claiming it is often smarter though (as long as it is not your principal residence).
Claiming the CCA is a tax deferral, which is usually good. Think of it like claiming an RRSP deduction. You could defer the deduction because you are going to have to pay it back when you withdraw the money, but in the mean time, you have the use of the tax saved and you may well be in a higher tax bracket today then when you sell the property.
Most commonly, we claim the CCA for our clients in order to bring the taxable income of the rental down to zero (unless the client is in a low tax bracket).
Ed
Feb 6th, 2010 @ 1:49 pm
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