What is CCA? How Small Business Owners Deduct Big Purchases

Hello. If you're a small business, self employed owner and you make a large purchase, you might assume that you can write the whole thing off as an expense in the year of purchase. Unfortunately, Revenue Canada does not see it this way. And you are required to write it off over a longer period of time by using something called capital cost allowance. And capital cost allowance is just government jargon for depreciation. And so in this video I'm going to explain to you what capital cost means, how it applies, and when you need to use it. My name is Ronica Cannon. I am a cpa, a CFA, and the founder of Montreal Financial. We you find lots of resources for your small business and I encourage you to sign up to my newsletter. So let's talk about the difference between an expense and an asset. And an expense essentially is something that can be written off right away and because you use it right away, so it might be a monthly service, or it might be pens or papers or office supplies. Monthly rent would be an expense because it doesn't necessarily have a benefit beyond the period for which you're paying for it. An asset, conversely, has a lasting benefit. And what this means is that when you purchase an asset, let's say, for example, a computer, a computer could conceivably last you for a few years, and therefore it isn't in the conventional sense in expense. And the fact that it has a lasting benefit has to be recognized in your accounting and by extension, your tax. So with an asset, therefore, what you would do, you wouldn't write off the full amount right away because again, this does not accurately reflect the usage of the asset, but instead you would depreciate it over a period of time that corresponds to how long you're going to use the asset for. Now, of course, making this determination for every single asset that you purchase is difficult and tedious, and Revenue Canada recognizes that. So instead of asking you to assign a specific life based on whatever your estimate is, it has created a system called Capital Cost Allowance. And within Capital Cost Allowance, you have various classes. And depending on the asset that you purchase, it will go into a specific class which will have a specific rate of depreciation associated with that class. So let's talk about one of the most common classes, which is for computers. And the class that you would use for computers is class 55. 0. And this class has a rate of 55% attached to it. And that means in any given year you can deduct 55% of the cost of the asset. Now, there's a couple of additional things that you should know about the way that this calculation is done. And first of all, CRA says you can buy the asset at any time during the year. But in year one, you'll only be able to deduct 50% of the depreciation rate of the capital cost rate and we're going to call it CCA from now on. So as mentioned, the CCA rate is 55%. But in year one, you will only be able to deduct deduct 27.5%, which is referred to as the half year rule. And this takes into account the fact that you might buy the assets mid year, you might, you could buy it on January 1st, but you could also buy it on December 31st. And therefore, again, Revenue Canada, rather than complicate things, they just say that in year one, it doesn't matter when you bought it, you can only take half of the cca. The second thing to keep in mind with respect to the calculation is that it is, it uses what's called a declining balance method. And the declining balance method is essentially the rate that you take would apply to the remaining undepreciated balance. So in year one, it's very easy. You take essentially 27.5%. Say you spent $1,000 on a computer, you would take depreciation of $275. So this means that in year two, at the beginning of year two, the undepreciated capital cost, UCC, another jargony word for all of this. So it means what you have left over from the previous year is $1,000 minus the $275. So you have $725 left of your undepreciated cost. Now in year two, you are allowed to claim 55, the full 55% in year two, because a half year rule no longer applies. So you would take 55% of that $725, which is $399. And then at the end of the year two, you have an undepreciated capital cost UCC of $326. And on and on and on. And so if you think about this, and if you like math, then you will notice that in fact you could never fully depreciate it. This could literally go on until infinity, until you actually sell or dispose of the asset. So now the question becomes, at what point do you consider something an asset versus an expense? And obviously, as mentioned, there should be a lasting benefit to the asset. So a computer or a phone or a car or some furniture that you purchase. These are all assets that should be depreciated. But there are some assets that really like a hard drive, for example, it may last you for five years, but it might only cost you $100. So should you depreciate that? And so formally, and contrary to popular opinion, this is a misconception. The Revenue Canada has an amount of $500. That above which you should consider something to be an asset. There is no amount. CRA does not give you a specific amount above which you should capitalize. And by capitalize I mean make something an asset versus expense something. So you have to use your judgment to determine if something is an asset or an expense. So again, coming back to what you should do, usually something that costs $100. And if you have a couple of these purchases a year, you don't really necessarily have to capitalize them, I. E. Make them an asset. You could probably simply expense them and it would be fine because chances are Revenue Canada is not really going to look into it. But once you get to a few hundred dollars, 300 or $400 potentially, and again, this is just my opinion, this is not necessarily fair fact. At that point you would probably consider capitalizing the asset and taking depreciation on it. And so as mentioned, the way that you would determine what rate applies is to determine what class your asset falls into. Most of you are going to be using Class 8, which is sort of a catch all class. It specifically includes things like furniture and equipment. It might include if you're photographic photographer, it might include your photography equipment. So it is something that potentially does not belong in another class and it is really useful. But it is important to review the other classes to make sure that there isn't something more specific. I also mentioned cars, cars would go into Class 10 or Class 10.1, depending on how much you paid for the car. And there are very specific rules about cars. And CRA actually gives you you a maximum up to which you can depreciate a car. So in 2025, the maximum amount for a car was $38,000. If you paid more than $38,000 for your car, it would go into Class 10.1. If you paid less, it would go into Class 10. And that means because it's in Class 10, the full amount would be taken into account and depreciated accordingly at a rate of 30. Class 10.1 limits the depreciation claim to $38,000. The other class to keep into mind as mentioned earlier, is Class 50, which is for things like computer equipment. I tend to put phones and tablets in there, anything that is computer equipment. And remember, there's some ambiguity. Some accountants might choose a different class, but as long as you have some justification for it, you can choose a class that you think most close resembles the asset that you're purchasing. And then there's a bunch of other classes and I'll leave a link to that in the description that you can look at. And you can also Google the asset that you purchase to determine what the correct class is. And so the way that this works in practice is if you are a sole proprietor your there is a special section on the T2125 form where you would enter the cost of the purchase. And if you're using tax software, which I encourage everyone to use, you would reflect the amount that you purchased onto the schedule. And the tax software will just automatically calculate it for you as long as you put it in the right class. And if you continue to use the tax software, it will carry forward the amounts from the previous year and it will automatically calculate your depreciation for the current year. You really don't have to do anything. So tax software really simplifies this process. And if you are a corporation, you are going to be showing your purchases on Schedule 8 of the T2 corporate tax return. And once again, if you're using tax software or if your accountant does it, you would just want to check schedule A to make sure that it's there. And the tax offeror will also calculate the depreciation and automatically carry it forward. And in every year you would determine if you have any additional assets to add to the class and you would reflect them as additions. Now, some final points that I'm going to make very briefly because these are perhaps a little more complex and if anyone's interested, let me know and I will make another video. There is something called terminal loss and recapture of cca and this applies to when you dispose of the asset and whether you disposed of it at a loss or whether you actually disposed of it at an amount higher than the undepreciated capital cost, the ucc. And that would have to be reflected in a specific way on your tax return. And the other thing I'm going to mention is something called the immediate expensing program diep, which was a special program that was introduced by Revenue Canada, but it ended in 2024 that that allowed you to write off 100% of your capital purchases in specific situations and under specific criteria. So once again, I'm not going to go into that, into too much detail now, but if anyone wants to know more, just let me know in the comments and I can make a separate video about that. Okay? So I hope this was helpful. If you have any questions, please leave a comment and I will try my best to answer it. And please like and subscribe and have a great day.