Capital cost allowance

Definition

Capital cost allowance (CCA) is a tax provision in Canada that allows businesses and property owners to deduct the cost of certain capital assets over time.

What is the capital cost allowance?

Capital cost allowance reflects the wear and tear, or depreciation, of assets used to generate income. This deduction acknowledges that capital assets, such as buildings, equipment, and vehicles, lose value over their useful life due to usage or wear.

The purpose of CCA is to match the cost of buying or improving capital assets with the income those assets generate. It helps businesses recover the cost of their investments gradually, rather than deducting the entire cost in the year the asset is purchased. By spreading out the deduction over several years, businesses can reduce their taxable income each year, which lowers their immediate tax liability and supports cash flow.

The amount of CCA that can be claimed annually depends on the type of asset and its class under the Income Tax Act. Different classes of assets have different rates of depreciation allowed by the CRA. For example, buildings might have a slower depreciation rate compared to vehicles or machinery. Taxpayers must comply with CRA rules regarding CCA rates, eligible assets, and recapture rules if the asset is sold or disposed of.

Example of the capital cost allowance

Let’s say a Canadian business purchases new manufacturing equipment for $100,000. Instead of deducting the full $100,000 as an expense in the year of purchase, the business claims CCA on the equipment over its useful life, typically determined by the Canada Revenue Agency based on asset class.

Suppose the CRA assigns a depreciation rate of 20% per year for this type of equipment. The business would claim $20,000 ($100,000 x 20%) as CCA expense on their tax return each year for five years. This gradual deduction reflects the equipment’s depreciation over time and helps reduce the business’s taxable income annually while accounting for the asset’s wear and tear.