Consider Deferring Capital Cost Allowance Claims

by Craig Anthony

1 min read

When you make capital purchases for your business, the Canada Revenue Agency allows you to write off a certain percentage of the purchase’s value each year. The percentage varies based on the type of item, and the amount of the write-off is called a capital cost allowance. For example, if you purchase a $50,000 corrugated metal building for your farm, you can write off 10% or $5,000 of its value in the first year. The next year, you get to write off another 10% of the value and so on until the entire cost is deducted. Each year, you can claim the entire capital cost allowance to which you are entitled, but this is not required. If you like, you can save the write-off for a future year. To continue with the above example, imagine you anticipate having a lot of income next year and want to avoid a huge tax bill. As a result, you don’t claim the $5,000 write-off in the year of purchase. Rather, you claim it the following year along with the capital cost allowance from that year. If you sell an item, you may have to report the income from the sale as a recapture of capital cost allowance. To explain, imagine you sold a building for $50,000 but had already written off $40,000. In this case, you have to report a recapture of capital cost allowance. That essentially means you give back your previous claim. If you don’t want to report a recapture, there is one way to avoid it. You simply have to replace the item you sold. In this case, if you replaced the sold building with a new $50,000 building, it effectively cancels out the sale. You should try to understand tax laws so you can optimize your business’ tax situation. Diligently reporting expenses is an effective way to keep your tax liability low, and in some cases, you may even want to roll capital allowances to a future year’s return.

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