Capital Cost Allowance


Capital Cost Allowance is the means by which Canadian businesses may claim depreciation expense for calculating taxable income under the Income Tax Act. Similar allowances are in effect for calculating taxable income for provincial purposes.

General rules for CCA calculation

Capital property

Capital property eligible for CCA excludes:
CCA is calculated on undepreciated capital cost, which is generally defined as:
Where the UCC for a class is negative, a recapture of depreciation is deemed to take place, thus adding to taxable income and bringing the balance of UCC back to zero. Where UCC for a class is positive, but all assets with respect to that class have been disposed of, a terminal loss is deemed to take place, thus deducting from taxable income and bringing the balance of UCC back to zero.

CCA calculation

CCA itself is generally calculated using the following items:
For assets subject to the full-year rule:
For assets subject to the half-year rule:

Types of allowance

Under the Income Tax Act:
Part XI of the Income Tax Regulations provides for the calculation rules for CCA, and Schedule II outlines the various classes of capital property that are eligible for it. Special rules are in place to deem certain assets to be in separate classes, thus not becoming part of the general pool for the class. Certain elections are available to taxpayers to transfer or reclassify assets from one class to another.
Additional allowances are prescribed with respect to specified circumstances. Specialized calculations for certain classes are also outlined in:
Part XVII of the Income Tax Regulations provides for specialized calculation rules for CCA with respect to capital property acquired for use in earning income from farming and fishing.

Typical classes of assets for CCA purposes

CCA is calculated under the half-year rule, except where otherwise specified, with respect to the following classes.
ClassRateDescription
14%Buildings acquired after 1987
35%Building acquired before 1988
715%Canoes and boats
820%Assets not included in other classes
925%Aircraft
1030%Automobiles, computer equipment and systems software for that equipment
10.130%Passenger vehicles costing more than $30,000. Each vehicle must be kept in a separate class, and no terminal loss may be claimed.
12100%
  • medical or dental instruments and kitchen utensils, costing less than $500
  • tools costing less than $500
  • computer software
  • video-cassettes, video-laser discs, and digital video disks for short-term rental
12100%
  • a die, jig, pattern, mould or last
  • the cutting or shaping part in a machine
  • a motion picture film or video tape that is a television commercial message
  • a certified feature film or certified production
    • 13Original lease period plus one renewal periodImprovements made to leased premises
    14Length of life of property Franchises, Concessions, Patents, and Licences
    178%Parking lots
    2950% straight-line Eligible machinery and equipment used in Canada to manufacture and process goods for sale or lease, acquired after March 18, 2007, and before 2016 that would otherwise be included in Class 43.
    4330%Manufacturing and processing equipment not included in class 29 - may be kept in separate classes by filing an election
    44Patents acquired after April 26, 1993
    4545%Computer equipment and systems software acquired after March 22, 2004 and before March 19, 2007
    4630%Data network equipment acquired after March 22, 2004
    5055%Computer equipment and systems software acquired after March 18, 2007
    52100% Computer equipment and systems software acquired after January 27, 2009 and before February 2011. Only applies to new equipment used in Canada.

    In contrast to the practice followed in the United States for depreciation there is no penalty for failing to claim Capital Cost Allowance. Where a taxpayer claims less than the amount of CCA to which he is entitled the pool remains intact, and available for claims in future years. Unclaimed amounts are not subject to recapture.

    Capital investment appraisal">Capital budgeting">Capital investment appraisal under CCA rules

    Because assets subject to CCA are generally pooled by class, and CCA is generally calculated on a declining-balance basis, specific techniques have been developed to determine the net present after-tax value of such capital investments. For standard scenarios under the full-year rule and half-year rule models, the following standard items are employed:
    More specialized analysis would need to be applied to:

    Full-year rule

    Capital cost allowance will be calculated as follows:
    Therefore, the Tax shield in year n =, and the present value of the taxation credits will be equal to
    As this is an example of a converging series for a geometric progression, this can be simplified further to become:
    The net present after-tax value of a capital investment then becomes:

    Half-year rule

    For capital investments where CCA is calculated under the half-year rule, the CCA tax shield calculation is modified as follows:
    Therefore, the net present after-tax value of a capital investment is determined to be:

    Case Law

    In cases where claims have been contested or disallowed by the Canada Revenue Agency, the Supreme Court of Canada has interpreted the Capital Cost Allowance in a fairly broad manner, allowing deductions on property which was owned for a very brief period of time, and property which is leased back to the vendor from which it originated. These decisions demonstrate the flexibility of the Capital Cost Allowance as a legal tax reduction strategy.