By Susan Ward. Small Business: Canada Expert
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Capital Cost Allowance (CCA) is calculated by using Area A on Form T2125 which is included with your T1 personal income tax return.
(Canadian corporations calculate their CCA using Schedule 8, which is part of the T2 corporate tax return. The procedure of calculating CCA outlined below works for corporations, too.)
When you look at Area A you’ll see that it’s a table with eight different columns and a separate chart for Motor vehicle CCA.
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Don’t be intimidated. Basically to calculate Capital Cost Allowance. you list all the additional depreciable property your business has bought this year, determine how much of the purchase cost of each property you can claim as an income tax deduction by seeing what CCA class each type of property is in, add that all up and then apply that to the Capital Cost Allowance balance you have carried over from last year (if any).
Let’s take a look at the different columns of Area A on the T2125 form.
Column 1, Class number is the place to record the CCA class numbers of your depreciable property. (Need a review? The Canada Revenue Agency provides a list of common depreciable property and their CCA classes in their T4002 - Business and Professional Income Guide. ) Logically, you won’t fill out this column until you’ve completed column 3, Cost of Additions.
Column 2, Undepreciated capital cost (UCC) at the start of the year. is where you fill in your running balance for each CCA class from last year.
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This information will be in Column 10 of your last year’s T2125 form, or, if you used income tax software to complete and file your income tax last year, already filled in for you.
You won’t be putting anything into Column 2 if this is your first year of claiming Capital Cost Allowance.
Column 3, Cost of additions in the year. is the column where you list all the depreciable property you have either acquired during the current tax year or made improvements to.
Note that before you do this, you will need to complete Area B - Details of equipment additions in the year and possibly Area C – Details of building additions during the year as well. because you are not going to just list your depreciable property in Column 3 willy nilly; it all has to be organized by Capital Cost Allowance class.
When you fill out Area B, for instance, you will not only be listing the details of the equipment you acquired or improved over the past year, (such as the new truck you bought), but grouping the equipment into the appropriate CCA classes and putting each class on a separate line.
Column 4, Proceeds of dispositions in the year. is the place to put the summary of your gains or losses from any depreciable property you disposed of over the last tax year.
Like Column 3, you will not be able to fill out Column 4 until you’ve completed Area D or Area E of form T2125.
In column 3 of Area D or Area E (depending on whether you’ve disposed of equipment, a motor vehicle. or a building). you will enter whichever of these amounts is less:
- your proceeds of disposition minus any related expenses; or
- the capital cost of the property.
Then you will fill in the Personal and Business columns of Area D or E with the appropriate percentages for your use. For instance, if you have bought a snow blower for your business, but also use it to blow snow out your own long driveway, you would enter 10% for personal and 90% for business in the personal and business columns relating to this piece of equipment.
When you are done completing Area D and/or Area E, copy the numbers from column 5 for each CCA class to column
4 of Area A for each class.
You need to calculate Column 5, UCC after additions and dispositions. Add Column 2 and 3 together and then subtract Column 4, putting the results in Column 5.
For each class, if the amount in Column 5 is negative, add it to income as a recapture on line 8230, "Other income," in Part 3 on page 1. If no property is left in the class and there is a positive amount in the column, deduct the amount from income as a terminal loss on line 9270, "Other expenses," in Part 5 on page 2.
Note that recapture and terminal loss do not apply to a class 10.1 property (passenger vehicles that cost over $30,000). For more information, see Chapter 4 of Guide T4002, Business and Professional Income .
Column 6, Adjustment for current-year additions. is for applying the half-year rule. In most cases, you can only claim Capital Cost Allowance on one-half of your net additions in the year that you acquire or make additions to a depreciable property.
So if, for instance, I bought a new washer and dryer for my bed and breakfast business. which cost $6000, I would only be able to base my CCA claim on half that amount ($3,000) in the tax year I purchased it.
If applicable, then, subtract column 4 from column 3 and put the result in Column 6, entering a “0” if the number is negative.
Column 5 minus column 6 will give you the entries for Column 7, Base amount for CCA .
Then, in Column 8, Rate. enter the CCA rate appropriate to the class. For example, a new laptop would belong in CCA Class 50 with a CCA rate of 55%. (See the Canada Revenue Agency’s T4002 – Business and Professional Income Guide for a complete listing of CCA classes.)
In Column 9, CCA for the year. first, determine your maximum possible Capital Cost Allowance deduction for each class by multiplying the base amount for CCA (column 7) by the CCA rate for that class (column 8).
Then enter the amount of CCA you choose to deduct this tax year. You can choose to claim all, none or any amount in between. Remember the CCA you don’t use this year will be available to you next year.
The total of all the amounts of Column 9 gets entered on line 9936 “Capital cost allowance (CCA),” in Part 5 of Form T2125.
If this is your first year of business and your fiscal period is less than 365 days, you have to prorate your CCA claim, basing your claim on the number of days you were actually operating during the year.
For example, if you started your business on August 1 and your fiscal year end date is December 31st, your actual fiscal period for your first year is 153 days, rather than 365.
So if you originally calculated your CCA claim to be $3,800, you would have to prorate your claim according to 153 days and could only claim $1,592 that year ($3,800 x 153/365).
Finally, in Column 10, UUC at the end of the year, subtract Column 9 (your chosen CCA claim amount for the year) from Column 5 (your UCC after additions and dispositions) to determine how much undepreciated capital cost is left in each class. When you calculate your CCA the next tax year, this is the number that will go into column 2.
(Remember to enter “0” in this column if you have a terminal loss or a recapture of CCA.
If you personally just worked through all this by hand, you can see why using income tax applications or having an accountant do your income tax for you are such popular choices for small businesses.
My Top Canadian Tax Software Programs presents information on the income tax applications I think are best for small businesses .
If you’re thinking that this is the year that you’re going to turn the job over to an accountant, read How to Find a Good Accountant for help with your search .
And for more on the taxes that affect your Canadian small business. including GST/HST and payroll taxes as well as income tax, visit my Tax Information hub .