Depreciation and Capital Cost Allowance

by HART (1-800-HART) on October 22, 2006 · 13 comments

in Accounting and Bookkeeping,Personal and Corporate Income Tax

Depreciation

We depreciate the value of Fixed Assets over the life of the asset in the financial statements, and generally the method of calculating this amount is specifically stated in the Notes to the Financial Statements as a company policy. It really doesn’t matter what method a company uses to record and calculate depreciation, but the company should continue to use that same method year after year. Generally, there are four different ways to calculate depreciation:

1) Straight Line Method

You take the value of the asset less what you think the value will be worth at the end of its useful life (salvage value for resale or be worthless) .. and divide by the number of useful years. Each year will have the same depreciation expense.

For example: Suppose you purchased an asset for $20,000 that has a useful life of 6 years, and you will probably sell it for $2,000 in year 7. Depreciation would be (20,000-2000=18000 / 6 = $3,000 expense per year, in each of the years 1-6. In year 7, when the asset is sold there would be a gain or loss compared to the $2000 originally estimated.

If you are preparing monthly statements, you might want to consider including a recurring depreciation charge of (3000/12= $250) per month.

It should be noted that even if you use the other methods, leasehold improvements are generally left to be depreciated over the life of the remaining lease years (or five years if you have a long term lease), with the straight line method.

2) Declining Balance Method

You take the value of the asset and deduct a desired rate depending on the type of asset. In the following year, you would recalculate this amount on the net book value of the Fixed Asset after the preceding year’s depreciation expense recorded.

For example: Supposed you purchased a vehicle for $20,000. Vehicles are generally depreciated at 30% declining balance rate (see below). Depreciation for the first year would be (20000 x 30%= $6,000) and the net book value would be (20000-6000=$14,000). Depreciation for the second year would be (14000 x 30%= $4,200) and net book value would be (14000 – 4200 – $9,800). You would continue to depreciate ‘forever’ and when the asset is finally sold .. a gain or loss would be compared with the net book value.

If you are preparing monthly financial statements and want to include the depreciation charge, I would just divide each annual amount by 12 to get the current month’s deduction. In Year 1 (6000/12 = $500 per month). In Year 2 (4200 / 12 = $350 per month).

3) Tax Rate Rules

Businesses cannot deduct depreciation for income tax purposes, instead they deduct capital cost allowance. This is basically using the declining balance method, with one specific difference. All net purchases during the year are subject to half rates. Businesses like using this method, because the net book value of the assets should (ideally) be equal to the undepreciated capital cost of the assets according to income tax. The reason, is because for income tax – there is a general reconciliation made:

NET INCOME – Per financial statements
ADD BACK: Depreciation recorded in the financial statements
DEDUCT: Capital Cost Allowance allowed for income tax
EQUALS – Taxable Income for Income Tax Purposes
(before other items naturally)

When both Depreciation and Capital Cost Allowance is the same, obviously there is not much difference to the net taxable income from the financial statement income.

For example, using the same $20,000 vehicle and 30% declining balance rate. In the first year, the amount would be (20000 x 30% = 6000 x 50% = $3,000). The net book value would be (20000 – 3000 = $17,000). In Year two, depreciation would be (17000 x 30% = $5,100) and the net book value would be (17000 – 5100 = $11,900).

4) Other Depreciation Methods Can Be Used for Financial Statements Purposes!

I just lumped all other types of ways to depreciation and calculate depreciation over the life of the asset, and will not make a list or anything. But as an example, there are companies that have sophisticated methods to calculate depreciation over the life of an asset. In the construction industry, that I know of, companies have specific ways to calculate the depreciation for Graders, Dozers, Asphalt Plants, and Hauling Trailers and Trucks .. that might be something like 40% first two years, 30% next three years, 20% for next two years, and salvage of 10% in year 8. Generally, if this were the case, they might depreciate using the straight line method. If we continue with the $20,000 Fixed Asset, (20,000 x 40% = 8000 / 24 = $333.33 per month for Years 1-2) .. In Year 3-5 it would be (20000 x 30%= 6000/36 = $166.67 per month for three years.

Capital Cost Allowance

Although you can have any depreciation method and policy for your business, Canada Revenue Agency only accepts one way – their way. Depreciation for income taxes is called Capital Cost Allowance (CCA). Amortization of non-tangible assets and leasehold improvements, are calculated using a different way, than declining balance. Some may be straight line method (but subject to half rate rules). Some we only take a percentage that is eligible and only depreciate that amount (called Cumulative Eligible Capital CEC) .. but that’s another story.

Here are the most current classes of assets and their rates according to Canada Revenue Agency. You can use them as a guideline for choosing the rates for your declining balance or tax rate rules policy for depreciating capital assets.

Generally (the common ones that you will use)

Buildings – Class 1
Equipment – Class 8
Vehicles – Class 10
Computers – Class 45
Paving – Class 17

Class 1 – 4% – Most buildings, acquired after 1987, including components
Class 2 – 6% – Electrical/gas generating equipment
Class 3 – 5% – Most buildings, acquired before 1988, including components
Class 4 – 6% – Railway/trolley system
Class 5 – 10% – Chemical pulp/ground pup mill
Class 6 – 10% – Buildings made of frame,log, iron, acquired before 1989
Class 7 – 15% – Boats and attachments
Class 8 – 20% – Furniture, appliances,photocopiers,telephones, tools costing > $200
Class 9 – 25% – Aircraft
Class 10 – 30% – Automobiles, Electronic Data Processings, farm machinery
Class 10.1 – 30% – Passenger Vehicles
Class 11 – 35% – Advertising signs/posters/bulletin boards
Class 12 – 100% – Computer Software (except System software), uniforms,small tools
Class 13 – 0% – Leasehold interests. Rate depends on type of leasehold and terms of lease
Class 14 – 0% – Patents, franchises, concessions, licenses
Class 15 – 0% – Property for cutting/removing timber
Class 16 – 40% – Automobiles for lease or rent, taxicabs, coin games, etc.
Class 17 – 8% – Roads, sidewalks,parking lot,telephone, non-electicalswitching equipment
Class 18 – 60% – Motion picture films/television commercia
Class 19 – 20% – Property of class 8 acquired June 14,63-Dec 31, 66
Class 20 – 20% – Property of class 3 or 6 acquired Dec 6,63-March 30, 67
Class 21 – 50% – Property of class 8 or 19 acquired Dec 6,63-March 30, 67
Class 22 – 50% – Power equipment for excavating/moving acquired March 15,64-Dec 31,89
Class 23 – 100% – Leasehold interst/concession/license
Class 24 – 0% – Property of class 2,3,6 or 8 acquired Apr 27,65-Dec 31,70
Class 25 – 100 Property of another class generall acquired before 1974
Class 26 – 5% – Catalyst/heavy water
Class 27 – 0% – Property of another class under special conditions
Class 28 – 30% – Property of another class under special conditions
Class 29 – 0% – Property of another class under special conditions
Class 30 – 40% – Unmanned spacecraft before 1990
Class 31 – 5% – MURB of class 3 or 6 under special conditions
Class 32 – 10% – MURB of class 6 under special conditions
Class 33 – 15% – Timber resource propety
Class 34 – 0% – Property of class 1,2 or 8 under special conditions
Class 35 – 7% – Railway car/rail suspension device
Class 36 – 0% – Depreciable property (para 13 (5.2) (c) acquired after Dec 11, 79
Class 37 – 15% – Property of another class in connection with an amusement park
Class 38 – 30% – Most power operated movable equipment for moving, excavating, etc.
Class 39 – 25% – Machinery and equipment used for manufacturing and processing good for sale/lease
Class 40 – 0% – Industrial lift truck (before 1990) and other special properties
Class 41 – 25% – Property in class 28 under special conditions
Class 42 – 12% – Fibre optic cable
Class 43 – 30% – Property of class 29,10,1,2 or 8 under special conditions
Class 44 – 25% – Patent/right to use patented information
Class 45 – 45% – Computer equipment (acquired after March 22,2004)
Class 46 – 30% – Data network infrastructure equipment (after March 22,2004)
Class 43.2 – 50% – Efficient energy production equipment acquired after 2005/02/22
Class 47 – 8% – Transmission/distribution property acquired after 2005/02/22
Class 48 – 15% – Combustion turbines that generate electricity acquired after 2005/02/22
Class 49 – 8% – Hydrocarbon transmission pipelines acquired after 2005/02/22

~~~~~~~~~~~

UPDATE:

Don’t Forget “Stuff For The Taking” – My Capital Assets Amortization Schedule Excel Template

(although it’s “Fixed Assets” and “Depreciation” now – not “Capital Assets” and “Amortization” .. athough “Amortization is still being used for non-tangible assets like goodwill, etc).

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{ 13 comments… read them below or add one }

1 saffi April 20, 2009 at 3:28 pm

Does home water heater falls in Class 8. So should it be charged 20% depreciation per year in a rental home.
i await for your kind response.

Thanks in anticipation
Saffi

2 HART (1-800-HART) April 20, 2009 at 8:09 pm

Hi .. I think every situation is unique, and please do not construe this advice, however the following articles may be of interest to your situation:

Capital expenditure or replacement cost
www.cra-arc.gc.ca/tx/bsnss/tpcs/rntl/crcp-eng.html

T4036 Rental Guide
www.cra-arc.gc.ca/E/pub/tg/t4036/t4036-e.html#P289_25449

What would I do? As I said – it depends on the situation. If a client’s water heater breaks down and you find a used one or relatively inexpensive one to replace it and get it working, I would probably just write it off as R&M. On the other hand, a lot of my client’s tend to upgrade when in that situation occurs to them, to more efficient water heater or greater capacity etc. e.g. if you are upgrading from a 100 gallon to a 500 gallon I would capitalize.

This is not always the case and subject to interpretation whether you upgrade or not. Even the Home Renovation Tax Credit Program includes Water Heaters as being eligible (opposed to that ineligible expenses such as routine repairs and maintenance)
www.cra-arc.gc.ca/gncy/bdgt/2009/fqhmrnvtn-eng.html

In the case – you would add it to Class 8, and is 20% subject to current tax rate rules (half rates in year of acquisition)

And, in most all other cases – if you are unsure, contact your own accountant and income tax preparer, or call the Canada Revenue Help Line – 1-800-959-8281. Sometimes on complicated issues, call there twice to see if you get the same answer :)

3 Ted November 4, 2010 at 2:12 pm

Great post especially for small business owners such as myself!

4 Rosie Hewitt February 6, 2011 at 5:40 pm

Great blog and info .. thank you!

5 joe January 2, 2012 at 2:20 pm

I have a very small business in which I have been doing the corporate tax return myself as it is very simple (the quotes I got from accountants was too high). I ran into a problem in which I was using the straight line method for depreciation and have come to come to end of the assets life (was using 5 years as life) but I am still using it and claiming CCA. The problem is that I still claim CCA on SCH 8 but have nothing to claim on SCH 1 or the financial statements and the software I am using is giving me warnings?? I am assuming that it is just a reminder that if you have any amortization to do to do it.

6 HART (1-800-HART) January 2, 2012 at 2:52 pm

Hi Joe ..

You are supposed to claim only CCA for income tax and not Depreciation claimed in your year end financial statements. So, on the T2S(1) you are to add back the depreciation claimed in the financial statements ($200.00 each year 1-5) and deduct actual CCA at current rate (probably 20%, 1/2 rate rules in first year). Most tax software gives 3 things … tips, warnings and errors. When there are errors, the software usually prevents you from giving a final printed or efiled copy. The warnings are just mentions of stuff that should have been, but the software did not detect. EG to remind you might have forgotten to add back the depreciation on the S(1).

It’s always good to look and make sure the warnings are things you know, and this just sounds like you know what’s going on (There should be depreciation added back, but it’s zero and fully depreciated in the books already so, you don’t have to add anything back > hence just a warning.
HART (1-800-HART) recently posted..Are You Following 1-8-0-0-H-A-R-T ?

7 Joe January 3, 2012 at 10:44 am

Thanks, that is the way I was doing it: Claiming amortization in the GIFI and then add it back on T2S(1) so it becomes a wash (net gain/loss = 0)and ONLY claiming CCA. Just was thrown off guard.

8 judy July 25, 2012 at 3:11 pm

what class does mobile homes fall into for cra

9 HART (1800-HART) July 25, 2012 at 3:50 pm

Hi Judy.

I would need more information before I attempt to answer. For instance … is this mobile home your permanent residence? used for M&P? is it a cottage? personal asset? are you a manufacturer of mobile homes for resale?

Thanks.
HART (1800-HART) recently posted..Are You One of Manitoba’s 17,000 Businesses To File Their RST Return Less Often?

10 judy July 25, 2012 at 6:21 pm

1976 or 1978 mobile used for rental purposes, actually located in a mobile home park on a rented lot and have a tenant

11 Nilynn Stearman December 28, 2012 at 4:07 pm

Thank you so much. This is the best thing I found to help me figure out Candian tax “Capital Cost Allowance” I am a US CPA and was struggling to match my client’s monthly financials to their year end returns.

12 HART (1800-HART) December 28, 2012 at 9:00 pm

Glad this old post is still useful Nilynn Stearman …If you have any further questions, please do not hesitate to post … Also, if searching CRA site for more on this topic, and for current classes of assets … this link might be worth bookmarking
www.cra-arc.gc.ca/E/pub/tg/t4002/t4002-e.html#P1135_97939
HART (1800-HART) recently posted..Here’s a Multitasking Infographic from OnlineCollege.org

13 Wayne Overbo March 21, 2014 at 10:05 am

Hi,

I’m looking for a useful life table(s) for the non-medical assets in a Canadian health care setting: office equipment, laundry, cafeteria (fridges, stoves, coolers), etc. Any help is appreciated.

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