You gotta spend money to make money, right?
As a business owner, you sometimes have to acquire property that loses its value over time.
You might need computers or smartphones for to get started, or you might add a building for office space as your business grows.
Under Canadian tax law, you are not permitted to deduct the entire cost of the property on your income tax for that year.
Instead, the Canada Revenue Agency (CRA) allows you a Capital Cost Allowance to deduct a calculated portion of the expense as an income tax deduction and continue doing this over a period of years as the property depreciates.
How do I know what’s eligible?
The CRA provides a list of items that are eligible for the Capital Cost Allowance deduction.
The list’s most common categories are buildings, vehicles, machinery and equipment, computers and miscellaneous items such as furniture, office supplies and signage.
Each category is assigned a class number and rate of depreciation, which you use to calculate your overall deduction on your T-2125, Statement of Business or Professional Activities.
What if I use the item for personal use, too?
Many times we buy items that we use for both personal and business purposes.
The items that come to mind are vehicles and computers.
You must report the amount of business vs. personal use on your T-2125. This is handled in Area B and C of the form. Your Capital Cost Allowance can also change from year to year if the amount of personal vs. business use varies.
Some pointers for claiming your allowance
Here are some tips to using your Capital Cost Allowance:
- You do not have to claim your Capital Cost Allowance in the year it occurs. If you do not have to pay any income tax for the year, you may not want to claim it. Rather you can use it in future years to offset a larger tax bill.
- In the year you acquire property, you can usually claim your allowance on only half of your net additions to a certain class.
- If you claim your allowance and then dispose of the property, you may have to add an amount to your income as a recapture of your allowance. You may be able to deduct an additional amount from your income as a terminal loss.
- If your fiscal period is shorter than 365 days, you have to prorate your claim.
The CRA provides an excellent online guide for figuring out your business income. You can use it as a reference for determining your Capital Cost Allowance.
Can you help?
We sure can. We specialize in small-business accounting and financial services. Contact one of our tax specialists and we can help you optimize the tax benefits and credits available to self-employed individuals and small businesses.
Fill our our contact form or give us a call at 403-226-8297.