Short Tax Year and Prorated Capital Cost Allowance (CCA)

A corporation's tax year is its fiscal period, which cannot exceed 53 weeks (371 days). A short tax year is a fiscal or calendar year that is less than 365 days. Short tax years typically occur when a business is started or when there is a change in the fiscal year-end.

The short taxation year rule applies when a company's tax year is shorter than 365 days. This rule ensures that tax deductions and other amounts are adjusted proportionally based on the length of the short year. For deductions like Capital Cost Allowance (CCA), the rule requires that these amounts be prorated based on the number of days in the short year compared to a full year.

Example 1: Olivia's Short Tax Year

Olivia opened a business on June 1, and her fiscal period ends on December 31, covering 214 days instead of 365 days. Olivia purchased a vehicle for $20,000 on April 1, which falls into Class 10 with a CCA rate of 30%.

Steps to Prorate the CCA Amount:

Calculate the CCA for a Full Year: Full Year CCA: $20,000 × 30% = $6,000

Determine the Proration Factor: Since the tax year has 214 days, the proration factor is 214/365 = 0.586

Prorate the Maximum Allowable CCA Amount: Prorated CCA Amount: $6,000 × 0.586 = $3,516

Result

For the short tax year, Olivia can claim a maximum of $3,516 in CCA for the vehicle.

Note: This proration reflects that the vehicle was used for only part of the year. In subsequent years, with a full 12-month tax year, she can claim the full maximum allowable amount (assuming she is eligible to claim the maximum).

For more information, please visit the Canada Revenue Agency: Canada Revenue Agency