Introduction This module will introduce and explain tax depreciation, which is known as capital cost allowance (CCA). In financial accounting, an asset can be depreciated by one of the following methods: straight-line, units produced or declining balance. CCA is a form of the declining balance method. In his module, we will learn how to calculate capital cost allowance and how to record the disposition and purchases of assets. We will discuss both commonly used CCA classes as well as some of the special classes. We will also learn about the special CCA provisions that apply when you buy or sell assets during the taxation year. Finally, we will discuss how to calculate CCA for indefinite life intangibles, such as goodwill. This module is shorter than the past ones, but there will be plenty of information to master as CCA can be claimed against both business and property income, as discussed in Module 4. Key Term or ConceptDefinition Tax Depreciation/Capital CostAllowanceThe deduction you can claim over a period of several years as an asset wears out or become obsolete over time. Terminal Loss When there is no longer an asset in the capital cost allowance class but there is still a positive amount of undepreciated capital cost. Meaning, your asset depreciated quicker than the prescribed capital cost allowance rate. You can claim this amount as a loss on your tax return. Recapture When there is no longer an asset in the capital cost allowance class and there is a negative amount of undepreciated capital cost. Meaning, your asset depreciated less than the prescribed capital cost allowance rate. You must report this amount as income on your tax return. Indefinite Life IntangibleThese are intangible assets with no foreseeable limit on its useful life, such as goodwill, trademarks and customer lists.
Key Term or ConceptDefinition Undepreciated Capital CostThe amount equal to the capital cost of all depreciable classes in a specific class, less the capital cost allowance claimed in previous years. Tax Depreciation / Capital Cost Allowance (CCA) Accounting depreciation (or amortization) is not deductible for tax purposes. Instead of allowing a tax deduction for accounting depreciation, the Income Tax Act allows the taxpayer to claim CCA on capital assets used to earn business or property income, and in some limited cases, employment income. (Fleming, 2018) Please not that CCA cannot be claimed against personal use assets, as they do not generate any income. Accounting depreciation rules are designed to write off the cost of the asset over time in order to match the cost of a capital asset with the revenues that the asset helps generate. Tax depreciation rates are designed to achieve government objectives such as generating tax revenues and encouraging capital investment. (Fleming, 2018) Accounting amortization and CCA are both designed to deduct the cost of an asset over a period of more than one year. As discussed in Module 4, there are current expenses and capital expenditures. When an asset has a lasting impact / useful life greater than one year, it represents a capital expenditure and CCA may be claimed against the asset. A CCA class holds similar capitalized assets together. For example, there is a CCA class for buildings, another one for vehicles, etc. In financial accounting, there are a couple of methods to amortize an asset. For tax purposes, all assets are assigned to a different CCA class. Each CCA class has its own rate, meaning the maximum amount of CCA that can be claimed is determined by the class's rate.
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