What is Capital Cost Allowance (CCA)?

By L.Kenway BComm CPB Retired

Edited April 25, 2024  |  Revised March 22, 2024  |  Originally Published on Bookkeeping-Essentials.com in 2010

WHAT'S IN THIS ARTICLE
CCA Defined | CCA vs Amortization | Timing Differences | CCA Rules | CCA Rates | Depletion | T5013 Slips | IFRS vs ASPE | Depreciation vs Amortization | Why Amortization is a Non-Cash Expense


Capital Cost Allowance (CCA) is a method used in Canadian income tax laws to calculate the yearly depreciation expense for tax reporting purposes. It is a way for businesses to recover the original cost of a depreciable property.

By comparison, the accounting treatment known as book amortization or depreciation is slightly different. CCA varies by asset class and allows for a declining balance method. Book depreciation tends to be more a straight-line method and doesn't have classes of assets.

What you should know about CCAWhat is capital cost allowance and why you may not want to make a full CCA claim on your tax return every year.

What is Capital Cost Allowance?

Capital Cost Allowance (CCA) is a concept used in Canadian taxation that allows for the depreciation recognition of certain assets. Tax rules in Canada do not permit companies to fully write off the cost of specific assets in the year they are acquired. As outlined by the Income Tax Act (ITA), these costs are categorized as capital assets or capital outlays. 

The role of CCA is to account for depreciation of these capital assets for tax purposes. Assets such as properties, vehicles, or software gradually lose their value or become outdated over time. With this in mind, CCA is a tax provision that lets businesses claim a deduction to reflect the steady depreciation or obsolescence of these capital assets.

Capital assets include items like computers, machinery, vehicles, or buildings which have a useful lifespan longer than a year. This contrasts with operating expense items such as rent, supplies, and advertisements which typically have a shorter usage period; usually less than one year. For instance, a vehicle could potentially serve a business for several years.

Recognizing this, Canadian tax laws permit businesses to claim a yearly deduction for a specified fraction of the asset's cost for its usage duration. This concept is commonly known as depreciation under the International Financial Reporting Standards (IFRS), or amortization under the Accounting Standards for Private Enterprises (ASPE). In income tax terminology, this is known as Capital Cost Allowance (CCA).

Every asset is categorized under a specific CRA class. The CCA is calculated using a declining balance method, dependent on the assigned percentage for that class, and the undepreciated capital cost (UCC) of the asset for that particular year.

Some common CCA classes include the Class 1 (buildings), Class 8 (furniture and fixtures), Class 10 (Vehicles), Class 12 (tools), Class 50 (Computer hardware), etc..


What is Capital Cost Allowance?

CCA vs Amortization - Timing Differences

CCA uses the declining balance method for depreciating assets while ASPE uses the lesser of salvage value or residual value to amortize assets. This can create a temporary timing difference in expenses claimed on your tax return and expenses claimed on your pretax accounting income. This timing difference generates deferred taxes and should be reconciled regularly.

Reconciliation of Book vs Tax Provisions (Deferred Taxes)

A deferred tax asset or liability may be generated during the reconciliation process of CCA and book depreciation if it is expected to reverse in future periods. However, in some cases, a worksheet may also be used to reconcile the differences.

According to SRJ CPAs (see references), "... various depreciation methodologies are available within Canadian accounting, allowing accountants the discretion to choose the most suitable approach. For the sake of simplicity, CCA and depreciation often align. Many accountants opt to depreciate assets in alignment with CCA guidelines, streamlining the tax filing process. This strategy minimizes administrative complexities since only one calculation needs to be tracked instead of managing two separate calculations. Nonetheless, this approach doesn’t necessarily guarantee that the recorded depreciation always precisely corresponds to an asset’s true useful life." This departure from ASPE would be disclosed in the notes.

Permanent vs Temporary Timing Differences

The IFRS explains that temporary timing differences are differences between taxable profit and accounting profit that originate in one period and reverse in one or more subsequent periods. Stated another way, transactions that are recognized for accounting purposes and for tax purposes but at different times. Temporary timing differences generate deferred taxes. Examples of temporary timing differences are:

  • accelerated depreciation for tax purposes (CCA) vs straight line amortization for financial reporting;
  • accrued liabilities;
  • prepaid expenses such as rent or insurance.

Permanent timing differences are those were an actual business event that is not an allowable tax deduction so will not reverse over time. Permanent timing differences do not generate deferred taxes. Examples of permanent timing differences are:

Know the Rules

What Is Capital Cost Allowance?

Know CCA Rules and Regulations

I have answered the question, "What is capital cost allowance?" Now let's learn some of the rules you need to know about CCA.

Some key CCA Rules include:

  • Half Year Rule: you can only claim half of the CCA you would normally be able to claim during the first year an asset is put into use. It may be advantageous to purchase assets before your fiscal year-end so you can claim the 50% CCA immediately and complete the full deduction next year.

  • Available for Use Rule: you can’t claim CCA until the asset becomes available for use.

  • Land and Living Things Rule: land and living things such as animals or plants cannot  claim CCA.

  • CCA Short Fiscal Year: For fiscal periods less than a year, the CCA is prorated based on the number of days in the period.

  • Recapture of CCA Upon Disposal of Asset: if you sell an asset for more than its undepreciated capital cost (i.e., make a profit), the difference is considered recaptured and is included in your income. You may want to consider not claiming CCA to avoid the gain on recapture. This makes way for any gain to be treated as a capital gain which is taxed at 50%.

  • Terminal Loss Upon Disposal of Asset: if you sell an asset for less than its undepreciated capital cost (i.e., have a loss) and have no assets left in that class, the difference is a terminal loss.

Apart from the asset needing to be operational for income generation, claiming the CCA isn't mandatory; for clarity, claiming CCA is optional.

As discussed, CCA is the common term in Canada for the tax deduction that businesses can claim for the cost of capital assets as they become obsolete or wear out over time due to business use. It's similar to the concept of depreciation in financial accounting. 

Claiming CCA - Your Options

The Canadian income tax system allows you to choose whether or not to claim the full CCA amount each year, and so it's possible to manipulate how much CCA to claim in any given tax year to optimize your tax outcome. 

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When your business is not profitable, claiming CCA may not be beneficial because you'll be reducing your taxable income, which is already low or non-existent due to the losses. By not claiming CCA, you can save the deduction for a future year when your income is higher and the tax benefit of claiming CCA is more substantial.

Also, you could partially claim CCA to the extent that it brings your net business income to zero. By doing this, you avoid creating or increasing a business loss and you’ll be able to use the remaining CCA in future years when you might have higher income.

When deciding which assets to defer claiming CCA on, generally you would want to defer the assets that depreciate more quickly first. These are typically the assets that have a higher CCA rate. This is because an asset that depreciates more quickly has more CCA deduction available in the early years after the asset is purchased, due to the accelerated rate of the CCA. By deferring the claim for the quickest depreciating assets, you are deferring more deductions to future years, which could be more beneficial if you expect to be in a higher tax position in those future years.

You may also want to forego claiming capital cost allowance if you have non-capital losses as non-capital losses expire and are lost. The carry forward periods are:

  • March 22, 2004 and earlier - 7 years
  • After March 22, 2004 - 10 years
  • After 2005 - 20 years (except ABIL* which is 10 years)

* Any unused ABIL (allowable business investment loss) after the 10 year carry-forward period becomes a net capital loss to offset against capital gains. It can be carried forward indefinitely.

Remember, tax laws are complex and change regularly. You should consult with an accountant or tax professional before making decisions about tax strategies for your business.


CCA Rates by Class

What Is Capital Cost Allowance?

Common CCA Business Tax Rates

The allowable CCA tax rates are found in the Income Tax Act Regulations 1100 Schedule II . It has classified different types of assets into classes. Each class of asset has a different CCA tax rate.

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Take care when you classify your assets. CRA does watch for this because if you pick the wrong classification and depreciate your assets too quickly, you would be deferring taxes.


Following is the application to the question, "What is capital cost allowance?". You should get a better feel now for how these rates will affect your bottom line as we put numbers to the taxation concept of CCA.

As a small business owner, the most common CCA classes, along with their tax rates, that you would probably be interested in are:

  • Land is not depreciable property
  • CCA Class 1 buildings (may also belong to class 3 or 6) 4%
  • CCA Class 8 office furniture, office equipment, small tools over $500 and equipment not listed in another class at 20%
  • CCA class 10 and 10.1 vehicles at 30%
  • CCA Class 10 computer hardware and systems software acquired before March 23, 2004 at 30% - see also class 45
  • CCA class 12 computer software other than your operating system and small tools under $500 at 100%
      ✔ prior to May 1, 2006 the threshold amount was $200
      ✔ do not include systems software here
      ✔ refer to the CCH publication Preparing Your Income Tax Returns to find out which class 12 items are exempt from the half year rule making the item 100% deductible in the year of purchase
      ✔ see bookkeeping for a small restaurant for information on aggregate purchases of small items and how to classify them
  • CCA class 45 computer equipment and systems software acquired after March 22, 2004 at 45% - see also class 50
  • CCA class 46 network equipment and associated systems software (that would have been included in class 8) acquired after March 22, 2004 at 30%
  • CCA Class 50 computer equipment and systems software acquired after March 18, 2007, that is not used principally as electronic process control, communications control, or monitor equipment, and the systems software related to such equipment, and data handling equipment that is not ancillary to general purpose computer equipment at 55%
  • CCA Class 54 Zero emission vehicles (ZEV) - learn more here 

You can find more business CCA classes along with their tax rates in the CRA publication T4002 Business and Professional Income. Its an appendix called Capital cost allowance (CCA) rates.

Take note that the CRA guide shows software classified as operating software (class 12) and systems software (class 10). As each type has a different CCA class, I think it's advantageous to track the two types separately in your books. 


What Is Capital Cost Allowance?

Allowance for Depletion

Depletion is a concept that's similar to Depreciation (which is basically what Capital Cost Allowance is based on), but it applies to natural resources like oil, gas, timber, minerals, etc, that a company might own. 

Allowance for Depletion is a taxation principle that allows companies to account for the reduction or "depletion" of these natural resources as they are used up over time. Basically, it's the method of gradually writing off the initial cost of the resource over its usable life.

So just know that when we discuss "What is capital cost allowance?", depletion is included in the broader definition of CCA.


What is Capital Cost Allowance and how is it different than an Allowance for Depletion?

The main difference between a Capital Cost Allowance and an Allowance for Depletion lies in what they are used for:

1. Capital Cost Allowance (CCA) is used to account for the loss in value of fixed assets like buildings, machinery, equipment, etc due to usage, wear and tear, or obsolescence.

2. Allowance for Depletion is used to account for the reduction in quantity of natural resources a company owns as they are extracted or used up.

In both cases, the allowances can be used to reduce the company's taxable income, reflecting the fact that these resources or assets are less valuable over time. But while CCA is based on the decrease in the asset's value, depletion considers the total quantity that has been extracted and sold.


Claiming an Allowance for Depletion

If a company in Canada has income from certain natural resources such as woodlots, sand or gravel pits, quarries, etc., it can decrease its taxable income by claiming an allowance for depletion. The allowance is meant to represent the reduction in the quantity of available natural resources as they are extracted and sold - which is a real business expense.

However, this expense doesn't directly impact the company's cash flow in the same way as, say, paying wages or buying equipment might. Instead, it's an accounting concept meant to show the reduction in value of the asset (the natural resource) over time.

Therefore, the allowance for depletion, similar to depreciation or capital cost allowance, is a non-cash expense that reduces the company's taxable income. Despite not causing an immediate outflow of cash, it represents a significant cost to businesses in these sectors because these resources are finite and will eventually run out.

Even though the cash flow statement does not reflect these costs, they are indeed actual expenses for the company. And the tax code, recognizing these unique expenses in extractive industries, permits companies to claim them through the allowance for depletion.


What Is Capital Cost Allowance?

CCA on T5013 Slips

If a partnership (an entity made up of multiple partners) owns something valuable that loses value over time (like a building or machinery), the partnership can claim a tax allowance (called the Capital Cost Allowance, or CCA) on this decrease in value. This means that the partnership can reduce its taxable income by this allowance amount.

However, individual partners cannot themselves claim this allowance on the partnership's property. In other words, the partners cannot individually claim a tax reduction on the loss of value of the partnership's property.

The allowance that the partnership can claim is determined by specific rules (the Regulations). The partnership is allowed to deduct the CCA from its income, but only up to the limit permitted by these rules.


Anwers to your questions about GST HST

What Is Capital Cost Allowance?

FAQ About Capital Assets - IFRS vs ASPE Treatment

While these frequently asked questions relate more to accounting standards than tax provisions, it should help clarify your understanding to the question posed in this article, "What is capital cost allowance?"


Some key differences between IFRS and ASPE

IFRS (International Financial Reporting Standards) was adopted in January 2011 as Canada's standard for most publicly accountable enterprises. It replaced GAAP (Generally Accepted Accounting Principles).

IFRS is based on a principles based approach which makes it more flexible while GAAP is a framework based on legal authority which makes it more detailed and prescriptive.

The four principles of IFRS are clarity, relevance, reliability, and comparability. Canada switched to IFRS mainly to improve financial reporting by making company financial statements consistent, transparent, and easily comparable around the world. This helps investors, auditors as well as tax preparation.

However, FASB (Financial Accounting Standards Board) has been working with IASB (International Accounting Standards Board) to make the different standards more similar than different. The latest example of this would be revenue from contracts with customers standards - GAAP ASU 2014-09 topic 606 and IFRS 15.

Since January 2011, private businesses in Canada have the choice to follow IFRS or a set of standards call ASPE (Accounting Standards for Private Enterprises). ASPE's starting point was Canadian GAAP. ASPE ensures financial statements are relevant, reliable, and understandable to the third parties who rely on them. Most private companies choose ASPE as it is the easier of the two standards. It was specifically designed to simplify certain accounting procedures to save small businesses time and money.

Here is a quick look at some differences between IFRS and ASPE relating to capital assets as found in Mr. Van Roestael's Intermediate Financial Accounting 1 textbook:

1. The depreciation method

  • IFRS calculates it using the asset's residual value.
  • ASPE calculates it using the lesser of salvage value or residual value. Salvage value is the estimated value of the asset at the end of its physical life, rather than its useful life.

2. The term used

  • IFRS uses depreciation
  • ASPE uses amortization

3. Models allowed

  • IFRS cost, revaluation, or fair-market value models
  • ASPE cost model only

4. Impairment testing

  • IFRS assessment for indications of impairment should occur at least annually.
  • ASPE impairment is tested only when circumstances indicate impairment may exist.

5. Impairment process

  • IFRS a one-step process to determine impairment, based on comparing recoverable amount with carrying amount, is used. Recoverable amount is the greater of value in use of fair value less costs to sell.
  • ASPE a two-step process is used. Impairment is tested first by comparing carrying value with undiscounted cash flows. If impaired, the loss is determined by subtracting the fair value from the carrying amount.

6. Impairment loss

  • IFRS can be reversed when estimates change. However, amount of reversal may be limited.
  • ASPE cannot be reversed

7. Assets held for sale

  • IFRS Assets that meet the criteria of held for sale are classified as current.
  • ASPE Assets held for sale can be classified as current only if the asset is sold before financial statements are completed.

8. Disclosure requirements

  • IFRS more extensive disclosure requirements must be met.
  • ASPE fewer and less stringent disclosure guidelines.

Why Is Depreciation Referred To As Amortization In ASPE?

As you can see above in the differences between IFRS and ASPE, IFRS uses the term depreciation and ASPE uses the term amortization.

When Canada was using GAAP as its accounting standard, it used to be that:

  • depreciation referred to the allocation of tangible assets (like equipment, vehicles, office furniture, buildings);
  • amortization referred to the allocation of intangible assets (like patents, goodwill, organization costs, franchise licenses); and 
  • depletion was used to describe allocating natural resources (like the oil in a reservoir).

In 1990, the CICA Handbook, in section 3060, began recommending the use of amortization instead of depreciation and depletion. Depreciation and depletion could still be used but it was felt that amortization was a more accurate terminology as some assets actually increase in value.

Around this time as well, fixed assets was replaced with the term capital assets. 

You might think that GAAP depreciation means the same thing as IFRS depreciation ... but not necessarily. GAAP (and ASPE) requires that capital assets be valued at historic cost (i.e., the purchase price) and depreciated. IFRS requires that capital assets be initially valued at historic cost but can be revalued up or down to market value.


Why is Amortization Called a Non-Cash Expense?

When reading this answer, keep in mind we have been talking about "What is capital cost allowance?". If your accountant has chosen to streamline the tax filing process by opting to depreciate your assets in alignment with CCA guidelines, it will still be a non-cash expense. So let's begin.

To understand why amortization is a non-cash expense, it's essential to first grasp what amortization is and how it impacts business financial statements, particularly the income statement and cash flow statement.

Amortization is an accounting technique used to lower the value of a capital asset or a loan gradually over time. This gradual decrease in asset value distributes the cost of the asset over its useful life. Examples of capital assets include machinery, vehicles, and buildings.

The income statement and cash flow statement are two key financial statements used in business accounting. Here's how they are different:

1. Income Statement: This statement provides a summary of a company's revenues, expenses, and profits (losses) over a specific period. The income statement shows how profitable a company is.

2. Cash Flow Statement: This statement shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, it shows how cash is moving in and out of the business.

Now, let's discuss why amortization is a non-cash expense.

When a business pays for a capital asset, it spends cash upfront to acquire it - this is usually accounted for in the cash flow statement under investing activities. However, the asset will provide benefits to the business over its useful life.

Amortization helps to match each period's earnings with the expense it cost to generate those earnings, complying with the matching principle of accounting. This is reflected in the income statement, where the amortization expense is deducted from revenues to arrive at income or profit.

However, it's called a "non-cash expense" because the company isn't actually spending cash in those periods. The cash was spent at the time of acquiring the capital asset. Therefore, while amortization decreases the company's reported earnings on the income statement (due to amortization expense), it doesn't reduce the cash balance reported in the cash flow statement for those periods (or your bank accounts).

In other words, amortization expense affects the profits, but doesn't affect the cash a company has on hand, since the cash transaction happened in the past.

That's why small businesses often find it helpful to differentiate between their profitability (on their income statement) and their liquidity or cash flow (on their cash flow statement). Despite an amortization expense lowering reported income, it does not decrease the cash a company has available for operations, reinvestment, or other purposes.

As always, it's recommended for businesses to work with a financial advisor or an accountant to ensure they are accurately accounting for such non-cash expenses.


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References: SRJ CPAs Capital Cost Allowance (CCA) – What is Tax Depreciation?

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