AFM202 Chapter Notes - Chapter 3: Capital Cost Allowance, Tax, Tax Deduction
18 May 2018
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P 48- 58
4.3 TAX DEPRECIATION
• Accounting depreciation is not deductible for tax purposes but it allows taxpayer to claim capital
cost allowance (CCA) on capital assets used to earn business income or property income or rarely
employment income and cumulative eligible capital amount (CECA) on certain expenditures to earn
business income
• Assets purchased for personal use are not deductible and no tax depreciation is allowed
• Tax depreciation rules for CCA and CECA is different from accounting depreciation.
• Tax depreciation rates are set to achieve government objectives such as generating tax revenues
and encouraging capital investment whereas accounting depreciation is to match expenses
• Similarities between tax and accounting depreciation
• Both attempt to write off the cost of capital assets over time
• Judgment must be used if an expenditure made in relation to a capital asset is of
maintenance which is FULLY DEDUCTIBLE IN THE YEAR INCURRED or a capital asset that
enhances the life or usefulness which must be capitalized and written off over time
• In tax purposes, capital assets are assigned to specific CCA asset class and tax depreciation is
computed based on the balance in each CCA asset class.
• Each CCA class has its own CCA rate; the rate represents the maximum CCA that may be claimed per
year on the undepreciated capital cost (UCC) of the asset class.
• E.g. UCC= $100 and rate is 20% then up to $20 of CCA may be claimed in that taxation year
as a deduction from net income for tax purposes
• Taxpayer can choose to claim less or zero CCA, cannot claim more than the maximum.
• Even if taxpayer has losses, claiming CCA which increases the amount of the non capital loss is often
beneficial since the non capital loss can be carried back or forward.
• Claiming CCA will tpiall redue a tapaer’s ioe fro a usiess or propert.
• In certain limited circumstances, an employee may claim CCA on his automobile as long as it is used
to earn employment income
• CCA claimed on a particular CCA asset class will reduce the UCC of that CCA asset class.
• Redued UCC= future ear’s aiu CCA dedutios will derease
• From the previous example, the UCC balance will be $80 at the beginning of the next taxation year
and the maximum CCA deduction will be 80*20%= $16
• Cost of capital asset includes all expenditure incurred to acquire the asset via freight, taxes, legal
fees and other fees that are related to the capital asset acquisition.
• Many assets will have provincial sales tax PST and goods and service tax GST or harmonized sales tax
HST included in capital cost.
• However, if the taxes are refundable to the payer via input tax credit granted for GST/HST paid then
the refundable taxes are not part of the cost of the capital asset
• If manufactured, then the cost of the asset whih adds to the partiular asset lass’s UCC iludes
material, labour and overhead
• With limited exceptions, capital assets must be owned by the taxpayer at year end to claim CCA. If
asset is disposed, the disposition will reduce the UCC balance in the CCA asset class which reduce
the amount of CCA claimable.
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Hst included in capital cost: however, if the taxes are refundable to the payer via input tax credit granted for gst/hst paid then the refundable taxes are not part of the cost of the capital asset. If manufactured, then the cost of the asset whi(cid:272)h adds to the parti(cid:272)ular asset (cid:272)lass"s ucc i(cid:374)(cid:272)ludes material, labour and overhead: with limited exceptions, capital assets must be owned by the taxpayer at year end to claim cca. If no assets remain in a cca class, no cca can be claimed although a terminal loss may exist. If no assets remain in the cca asset class and a positive ucc balance remains in the cca class, the entire positive ucc balance is allowed as a tax deduction in the year. Cca rate 30: class 12: computer software (regardless) and tools costing less than rate is 100, class 44: patents. E. g. business commenced on september 1st 2016 and fiscal year end.
