Capital Cost Allowance (CCA) and Depreciation

Depreciation is an accounting method used to allocate the cost of a tangible asset, like machinery or vehicles, over its useful life. Capital Cost Allowance (CCA) is the tax equivalent of depreciation. While depreciation is used for accounting purposes to calculate net income or loss, CCA is used to calculate taxable income. Depreciation rates are determined based on the expected useful life of the asset.

The deductible portion of an asset's cost for tax purposes is called CCA. Each asset is categorized into a specific CCA class, and CCA is calculated on a declining balance using the rate assigned to that class. The rates are prescribed by the Canada Revenue Agency (CRA).

Steps for Calculating CCA:

Opening Balance: Start with the Undepreciated Capital Cost (UCC), which is the remaining balance of the asset’s cost from previous years.

Additions: Include any new assets purchased during the year in the relevant CCA class.

Half-Year Rule: Apply the half-year rule by allowing only 50% of the current year’s additions to be eligible for CCA in the first year.

Dispositions: Subtract the proceeds from any disposed assets during the year.

Base for CCA: Calculate the CCA base using the formula:
Opening Balance + Additions – Half-Year Rule – Dispositions

CCA Rate: Apply the CCA rate prescribed for the asset class.

CCA Deduction: Calculate the deduction using the formula:
Base for CCA × CCA Rate

Ending Balance: Subtract the CCA deduction from the opening balance to determine the closing UCC balance, which will carry forward to the next year.

For additional information, visit the Canada Revenue Agency: Canada Revenue Agency