The cost of a capital asset purchased by a business is deducted under the capital cost allowance (CCA). The CCA deduction can often be inadequately or incorrectly used by taxpayers, with the result that tax on business income is overpaid for several years, notes Evelyn Jacks in Make Sure its Deductible Little Known Tax Tips for Your Small Canadian Business. Here are some of things to keep in mind:
1. Assets with life spans greater than a year (such as buildings, vehicles or computers) need to be written off over several years, except in the case of small equipment and supplies costing less than $500 — which can be fully written off in the current year.
2. A CCA claim is at the discretion of the taxpayer, which enables them to schedule it in a year when it most reduces taxes.
3. If an error is made in claiming CCA, the taxpayer will only have 90 days after receiving the Notice of Assessment or Reassessment to fix it (unlike10 calendar years for most other federal provisions).
4. When repairs add to the value of the asset, they are usually added to the capital cost of the asset; if they only restore the asset to its original condition, they can be written off in full the same year (which adds to cash flow).
5. In the year an asset is acquired, the CCA can only be applied to half the cost of the asset. If some assets in the same class were disposed of, they need to be subtracted from the cost of acquisitions before calculating CCA.
6. Interest costs to buy capital assets can be claimed as an operating expense. Or they can be capitalized and added to the undepreciated capital cost of the asset, which allows the taxpayer to preserve more of those costs for future use, observes Ms. Jacks. This can be handy when the firm is losing money in the current period and there is no value to claiming interest costs as operating expenses.
7. If a disposition results in proceeds in excess of the cost of the asset, a capital gain is the result and it has to be reported on the tax schedule for capital gains and losses.
8. If the proceeds from disposing all of the assets in the asset class end up higher than the cost for the class, this results in a negative undepreciated cost that is needs to be included (recaptured) in income for the year. If the proceeds end up lower, this is a terminal loss that reduces income for the year.
9. Claim input tax credits for GST/HST paid on capital assets where possible (which helps with cash flow). Be sure to reduce capital cost by the ITC received.