In Canada, there is an annual deduction for the cost of certain assets that can be claimed on income taxes. Allowance rates are set by the Canada Revenue Agency.
Assume the purchased equipment cost is $20,000. In year one, the allowance is based on only half the value. Starting year two, it is based on the total depreciated value. In this example, the allowed claim is:
- Year 1: $20,000 x 50% x 20% = $2,000
- Year 2: ($20,000 – $2,000) x 20% = $3,600
- Year 3: ($18,000 – $3,600) x 20% = $2,880
This pattern continues until the allowance reaches $0.
Situations vary, but due to the restriction in the first year, it is probably not wise to sell depreciable assets in year one. Otherwise, it may be best to sell the asset as close to year-end as possible to take full advantage of the year’s allowance.