Capital Cost Allowance (CCA). What does it mean?
- Mike Sarnecki
- Nov 1, 2023
- 2 min read
Updated: Nov 14, 2023
Have you ever been in a situation where your accountant keeps talking about CCA and you have no idea what it means? In this article we will cover what CCA is, how it CCA works, how it can be claimed, and things to consider if you own a rental property or run a small business.
Current vs Capital Expense
In order to understand CCA you need to first understand the difference between capital and current expenses as they relate to your taxable income.
Here's a breakdown of the key differences between the two:
Current Expense (OpEx):
Also known as operating expenses, are associated with the day-to-day operations of a business. They are short-term costs necessary to maintain the regular business activities and are usually incurred within a single fiscal year. Costs to repair an asset to its original condition can also be considered a current expense.
Examples: Rent, utilities, wages, office supplies, and other costs related to ongoing business operations are considered current expenses. These are recurring costs that directly contribute to generating revenue in the current accounting period.
Tax Treatment: Current expenses are deducted against the business net income in the year that they are incurred.
Capital Expense (CapEx)
Are associated with the acquisition, improvement, or maintenance of long-term assets. These assets are typically expected to provide benefits over an extended period, usually beyond one tax year.
Examples: Purchasing or upgrading property, equipment, vehicles, or machinery are common examples of capital expenditures. Costs incurred for construction, development, or significant enhancements to existing assets are also considered capital expenses.
Tax Treatment: Rather than being fully deducted in the year of purchase, capital expenses are depreciated or amortized over their useful life.
How do I know how much CCA to take every year?
Lucky for us the CRA divides capital assets into a number of categories or “classes” and specifies exactly how much CCA you can claim. Each class has a specific percentage you can claim each year.
For example, let's imagine you purchase a rental unit. A few weeks after the purchase, your tenant lets you know that the fridge has broken down and needs to be replaced. Being a good landlord, you have a new fridge delivered the same day. Both the expense of the unit itself and the new fridge are both considered to be long-lasting and therefore capital assets. However, each asset is classed differently. The common class for the rental unit would be class 1 which has a rate of 4 percent. This means that each year you are allowed to claim 4% of the cost of the building on your tax return. The fridge would be class 8 with a rate of 20 percent. You’d claim only 20% of the cost of the fridge on your tax return each year. The remainder of the cost after claiming the rate is called Undepreciated Capital Cost (UCC).
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