When compiling year-end financial
statements, or preparing a personal tax return, it is common for
us to discover that a client has grouped capital asset purchases
with various categories of operating expenses. A common error is
the inclusion of computer equipment with office or computer
The Canada Revenue Agency (“CRA”) has strict rules regarding the
write-off of capital assets. In simple terms, a Capital asset is
an asset, such as a computer, desk, or a building, whose useful
life will extend beyond one year. Unlike general office
supplies, or an advertising expenses, which is generally
incurred and utilized within a short period of time, a capital
asset must be written off over a number of years.
Therefore, the CRA ‘classifies’ assets into like groups and
allows taxpayers to write-off these capital assets based on the
percentage associated with each class. This write-off is called
Capital Cost Allowance or CCA.
A simple example is the purchase of a piece of office furniture,
such as a desk. A desk falls under Class 8 and has an annual
write-off of 20%.
However, there is one additional consideration regarding CCA in
the year an asset is purchased. The CRA imposes another rule
called “the half-year rule” which reduces CCA in the year of
purchase by 50%. Therefore, continuing with the above example,
if a desk were purchased by a Company for $1,000, the eligible
write-off the first year would be $100. This is 50% of the
allowable 20% CCA rate. Therefore, the second year would provide
for a write-off of 20% of the remaining $900 asset balance (the
purchase price of $1,000, less the $100 write-off taken in the
first year), which would provide for a $180 write-off.
To learn more about Capital Cost Allowance and how to maximize
your write-offs relative to capital asset purchases,
please give us a call.
NOTE: The Shannon
& Company 'Tips' are NOT intended to cover all tax issues. You
should talk to your Shannon & Company professional before making
any decisions regarding the information found here.