Capital Cost Allowance - CCA

There are two types of expenses, current and capital. Current or operating expenses are costs incurred in the day to day operation of the business. Some examples would be: meals & entertainment, office supplies, rent, telephone and utilities. Generally the benefit is derived from these expenses when they are incurred and as such they are deductible in the year that they are incurred.

Capital expenses on the other hand are costs incurred for items such as: tools & equipment, furniture, buildings & fixtures, machinery & equipment. Given that the benefit of these items is not derived in the year the costs are incurred (as many are long term assets) the CRA does not allow the deduction in the current year. Rather the deduction is taken over a number of periods using a system called Capital Cost Allowance or CCA.

CCA allows you to deduct the total cost of the asset purchased over a number of years. If you are familiar with depreciation, it follows the declining balance method. Each year, you are allowed to deduct up to a maximum CCA based on the rate allowed for asset class. The CRA dictates different classes of depreciable property based on the type of asset and sets a maximum CCA rate, for instance Class 1 is for buildings acquired after 1988, the rate for Class 1 is 4%. Depending on the asset being purchased, it will be put into a different class with a different rate. When you purchase an asset, the cost of that asset is added to the Undepreciated Capital Cost or UCC. The total UCC for each class is then multiplied by the rate to determine the maximum CCA.

For example, if you owned furniture (class 8) with a UCC of $10,000 you would be allowed to deduct up to 20% (the CCA rate for class 8) in the year or $2,000.

For more information and a list of classes and applicable rates see the CRA website.

CRA Website- Capital Cost Allowance: