Capital Cost Allowance (CCA)

1
Capital Cost Allowance (CCA)

• Depreciation is not a tax deductible expense
• CCA is the tax equivalent of depreciation
• CCA may be used as a method of amortization,
  particularly by smaller companies
• CCA follows procedures similar to those for the
  declining-balance method
• Uses rates (the CCA rate) prescribed by the
  Canada Revenue Agency (CRA)

2
Capital Cost Allowance (CCA)

• Assets are grouped into classes
• Each class has a CCA rate prescribed by the CRA
• In the year of acquisition, the half-year rule
  applies
• Half-year rule is applied to each class on net
  additions
• CCA may be claimed even if it results in a UCC
  (Undepreciated Capital Cost) that is less than
  estimated residual value
• Not required to take the maximum rate of CCA or
  even any CCA in a given year

3
Selected Examples of CCA Classes
Class Rate Examples
1 4 Bridge, canal or building
6 10 Greenhouse, oil or water storage tank
8 20 Machinery or equipment not in another class
10 30 Automotive equipment, processing equipment
42 12 Fibre optic cable
4
Capital Cost Allowance (CCA)

• When an asset is disposed of, the lower of its
  original cost or the proceeds from disposition is
  deducted from its CCA class
• If no assets remain in a particular class
• any remaining undepreciated balance is deducted
  from taxable income (terminal loss)
• if a credit (negative) balance results, that
  credit is added to taxable income (recapture of
  CCA)

5
CCA An Example

• On March 28, 2007, equipment is acquired this is
  the only asset in the CCA class

Cost 500,000 CCA Class 8 Useful Life
10 years CCA Rate 20 Residual Value
30,000
6
CCA An Example
Description 2007 2008 2009
UCC January 1st 0 450,000 360,000
Addition 500,000 0 0
Disposals 0 0 0
500,000 450,000 360,000
CCA 500,000 x ½ x 20 450,000 x 20 360,000 x 20 50,000 90,000 72,000
UCC Dec. 31st 450,000 360,000 288,000
7
CCA An Example

• Continuation of example above
• In 2010, additional equipment was purchased for
  700,000
• In 2011, equipment purchased in 2007 is sold for
  300,000
• In 2012, remaining Class 8 assets sold for
  500,000-No other assets remain in the class

8
CCA An Example
Description 2010 2011 2012
UCC- January 1st 288,000 860,400 448,320
Addition 700,000 0 0
Disposals (lower of cost or proceeds) 0 300,000 500,000
988,000 560,400 (51,680)
CCA (288,000 x 20) (700,000 x ½ x 20) 560,400 x 20 Recaptured CCA 127,600 112,080 51,680
UCC Dec. 31st 860,400 448,320 0