What is Capital Cost Allowance?
Capital Cost Allowance (CCA) is a system which allows annual deduction on depreciable assets used to earn income. It is important to understand that this deduction is only allowed on depreciable capital assets used to earn income.
How does Capital Cost Allowance work?
When a business purchases assets such as equipment or buildings to be used in a business to produce income, the business is allowed to depreciated the cost of the asset over the useful life of the assets.
This allows a business to reduce taxable income over the useful life of the asset. CCA is a non-refundable tax credit to be applied against a capital asset.
This deduction is voluntary which means that a business is not required to apply this deduction. There are instances when a business may not want to apply this deduction to reduce income for tax purposes. The great thing about Capital Cost Allowance is that you can choose the amount of deduction up to the maximum deduction allowed. This makes CCA a great tool for tax planning.
A great example of this is when a business is carrying losses. It may be beneficial from a tax planning point of view not to reduce income through CCA deduction and instead use losses to reduce taxable income.
An important point to remember is that not all assets qualify for CCA deduction and not all assets are treated equally under CCA rules. CRA has strict CCA rules to follow. There are different classes of CCA depending on the asset. If you are interested to learn more about these classes then it is best to visit CRA website.
Claiming CCA depreciates your asset and reduces the book value of the asset. This means that if you sell your asset within a short period of owing it and you have claimed CCA then you may be liable to pay back claimed CCA. This happens if you sell your asset for more than the depreciated value then you have claimed.
Whether you should claim CCA ultimately comes down to your circumstances and long-term plans. This is a complicated area and it advisable to seek guidance from a tax professional.
Disclaimer: Information provided may not be complete or accurate. It should not be considered financial advice.