Capital property

Capital property eligible for CCA excludes:^[1]

• land
• property the cost of which is deductible in computing the taxpayer's income
• property that is described in the taxpayer's inventory
• property that was not acquired for the purpose of gaining or producing income
• property that was acquired by an expenditure in respect of which the taxpayer is allowed a deduction under section 37
• specified artwork and crafts acquired after November 12, 1981
• property that is a camp, yacht, lodge or golf course or facility acquired after December 31, 1974 if any outlay or expense for the use or maintenance of that property is not deductible by virtue of paragraph 18(1)(l)

CCA is calculated on undepreciated capital cost ("UCC"), which is generally defined as:^[2]

• the capital cost of property that is acquired or made available for use (whichever is the later date)
• plus legal, accounting, engineering or other fees incurred to acquire the property
• plus, in the case of a property a taxpayer manufactures for his own use, it includes material, labour and overhead costs reasonably attributable to the property, but nothing for any profit which might have been earned had the asset been sold
• less the proceeds of disposition for a sold asset (but no greater than its original capital cost)
• less any assistance (including tax credits) the taxpayer has received with respect to the acquisition of the property
• less any CCA previously claimed with respect to the class

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.^[3]

CCA calculation

CCA itself is generally calculated using the following items:

CCA = capital cost allowance for the current fiscal period

UCC = undepreciated capital cost before claiming CCA in the current fiscal period

t = the proportion of days in the current fiscal period vs a normal fiscal period, if the current fiscal period is a stub, otherwise 1

d = the specified CCA rate with respect to the class

a = acquisition cost of the property in the current fiscal period

b = proceeds of disposition with respect to the property in the current fiscal period (but not greater than its original cost)

c = assistance received with respect to the property in the current fiscal period (net of any repayments made)

For assets subject to the full-year rule:

${\displaystyle CCA=tdUCC}$^[4]

For assets subject to the half-year rule:

${\displaystyle CCA=tdUCC-{\frac {1}{2}}td\left(a-b-c\right)}$^[5]

Types of allowance

Under the Income Tax Act:^[6]

• paragraph 18(1)(b) prohibits the deduction of any outlay, loss or replacement of capital, payment on account of capital or any allowance for depreciation, obsolescence or depletion, unless specifically allowed in Part I of the Act.
• paragraph 20(1)(a) allows a deduction, in computing the income from a business or property, of any amount allowed by regulation in respect of the capital cost of a property.^[7]

Part XI of the Income Tax Regulations provides for the calculation rules for CCA,^[8] and Schedule II outlines the various classes of capital property that are eligible for it.^[9] 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.^[10] Certain elections are available to taxpayers to transfer or reclassify assets from one class to another.^[11]

Additional allowances are prescribed with respect to specified circumstances.^[12] Specialized calculations for certain classes are also outlined in:

• Schedule III for property in Class 13 (leasehold interests)^[13][14]
• Schedule IV for property in Class 15 (property for cutting and removing timber from a timber limit)^[15][16]
• Schedule V for property relating to industrial mineral mines^[17][18]
• Schedule VI for property relating to timber limits and cutting rights^[19][20]

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.^[21]

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.

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.

Full-year rule

Capital cost allowance will be calculated as follows:^[26]

Year	Calculated CCA
1	${\displaystyle Id}$
2	${\displaystyle Id(1-d)}$
3	${\displaystyle Id(1-d)^{2}}$
n	${\displaystyle Id(1-d)^{n-1}}$

Therefore, the Tax shield in year n = ${\displaystyle Itd(1-d)^{n-1}}$, and the present value of the taxation credits will be equal to ${\displaystyle Itd\sum _{n=1}^{\infty }{\frac {(1-d)^{n-1}}{(1+i)^{n}}}}$

As this is an example of a converging series for a geometric progression, this can be simplified further to become:

${\displaystyle PV={\frac {Itd}{i+d}}}$

The net present after-tax value of a capital investment then becomes:

${\displaystyle I\left(1-{\frac {td}{i+d}}\right)}$^[27]

Half-year rule

For capital investments where CCA is calculated under the half-year rule, the CCA tax shield calculation is modified as follows:

${\displaystyle {\begin{aligned}PV&={\frac {1}{2}}\left({\frac {Itd}{i+d}}\right)+{\frac {1}{2}}\left({\frac {Itd}{i+d}}\right)\left({\frac {1}{1+i}}\right)\\&={\frac {Itd}{i+d}}\left[{\frac {1}{2}}+{\frac {\frac {1}{2}}{1+i}}\right]\\&={\frac {Itd}{i+d}}\left[{\frac {{\frac {1}{2}}\left(1+i\right)+{\frac {1}{2}}}{1+i}}\right]\\&=\left({\frac {Itd}{i+d}}\right)\left({\frac {1+{\frac {1}{2}}i}{1+i}}\right)\\\end{aligned}}}$

Therefore, the net present after-tax value of a capital investment is determined to be:

${\displaystyle I\left[1-\left({\frac {td}{i+d}}\right)\left({\frac {1+{\frac {1}{2}}i}{1+i}}\right)\right]}$