Capital Cost Allowance (CCA)

 
 
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Straight Line Method | Declining Balance Method | Dispositions of Depreciable Property | Flexibility of CCA Claim | Available for Use Rules | Half-year Rule | Classes 1-12 Election | Year of Death | Rollover to Children | Year of Transfer/Rollover | Short Fiscal Period | Reserves | Large Trucks
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The cost of fixed assets such as machinery, equipment, vehicles and buildings cannot be deducted as an expense in one taxation year. Instead, the expenditures are considered to be of a “capital” nature. As a result, the cost must be spread over a period of years by taking a deduction based on the cost of the asset.

The distribution of the cost of an asset over its estimated useful life is termed “depreciation.” The term “capital cost allowance” is a tax term referring to the amount that The Canada Revenue Agency allows a farmer to deduct as depreciation in computing net farm income.

Under the pre-1972 tax system, farmers could choose between two methods of depreciation for calculating capital cost allowance:

Straight Line Method (Part XVII)
Under current law, the straight line method is being phased out. Assets purchased after December 31, 1971, cannot be depreciated using this method. However, assets that were owned on December 31, 1971, may continue to be written off using this method provided they have never been written off using the declining balance method.

Declining Balance Method (Part XI)
The declining balance method requires certain assets to be grouped into classes, and capital cost allowance is allowed at a prescribed rate based on the cost of assets in the class.

Dispositions of Depreciable Property
Where a depreciable asset is sold or traded, the proceeds of disposition up to the original capital cost reduce the tax base of the assets of the particular class to which the asset belonged. As a result, the capital cost allowance for the year will be lower than it otherwise would have been. If the proceeds are greater than the tax base of the class, the excess is called “recaptured capital cost allowance.” Under the declining balance method, the full amount of recaptured capital cost allowance is included in farm income.

A “terminal loss” is just the opposite of recapture. It results when all declining balance assets are sold for proceeds less than undepreciated values of the assets of that class - a balance remains in the class; however, there are no assets remaining. A terminal loss is fully deductible from farm income in the year it arises.

Tips and Traps

Flexibility of CCA Claim

  • A farmer can choose to make a capital cost allowance claim for any amount up to the maximum percentage for that class.
  • In a year where a farmer does not need to use the maximum deduction, a good strategy may be to choose to take CCA on the classes with the lowest maximum write-off rates. This strategy ensures that the balance in a higher rate class can be preserved and a larger CCA claim will be available in the subsequent year (where maximum claim may be beneficial).
  • In some instances, it may be useful to claim full CCA in the current year and claim an amount of Optional Inventory Election (OlE) to bring income to a desired level. In the next year, both OlE and CCA can be deducted.
Available for Use Rules
  • CCA may only be deducted on assets available for use at the end of the taxation year. For other assets that may have been purchased but aren’t actually available for use, CCA may not be claimed until the year in which the assets are actually available for use. For example, a combine purchased in the fall that is yet to be manufactured would not be eligible for CCA as it is not yet available for use. (Note: this regulation does not require actual use, just that the asset must have been available for such use.)
Half-year Rule
  • In the year that a depreciable asset is acquired, the maximum CCA that can be claimed on that asset is limited to one-half the regular CCA
  • The half-year rule applies to net additions. Where the farmer disposes of equipment, the restricted CCA claim will only apply to the cost of the assets acquired less the disposal proceeds deducted from the CCA pool.
  • If the farmer is acquiring assets, the CCA claim is the same whether the asset is acquired early or late in the year (assuming it is available for use). Therefore, assets acquired near the end of the year still result in a CCA claim for the year.
  • The half-year rule does not apply to a non-arm’s length acquisition (if owned at least one year before the end of the year in which the farmer acquired it).
Classes 1-12 Election
  • The Income Tax Act provides an election that allows the farmer to transfer property from Classes 2 to 12 into Class 1.
  • The effect of this election is that property is transferred into Class 1 prior to reporting the disposition which will allow the farmer to defer potential recaptured depreciation on a disposition.
  • The remaining assets must stay in Class 1 until they are disposed of and will be depreciated at a significantly lower rate (4 per cent).
  • Future additions are added to the appropriate class.
For example:
Undepreciated Capital Cost
Class 6 25,000
Class 8 75,000
Class 10 45,000

Farmer disposes of Class 10 assets for proceeds of $120,000 (original cost $120,000).

Normally, this would result in taxable recapture in Class 10 of $75,000. By electing to transfer all Class 6, 8 and 10 assets into Class 1, the sale of all the former Class 10 machines could defer the potential recapture of CCA that such a sale would otherwise have attracted. The CCA schedule would be as follows:

OpeningTransfersDisposalsEnding
Class 10145,000120,00025,000
Class 625,000(25,000)0
Class 875,000(75,000)0
Class 1045,000(45,000)0

The assets sold to any purchaser (arm's length or non-arm's length) would be depreciated in the appropriate capital cost allowance class on an asset by asset basis.

Year of Death

  • In the year of a farmer's death, the Canada Revenue Agency deems the farmer to have disposed of all depreciable assets for proceeds equal to Fair Market Value. In certain cases, property may qualify for a rollover to a spouse or child, and in those cases, there would not be a deemed disposition.
Rollover to Children
A farmer can transfer depreciable assets to a child at undepreciated capital cost (UCC) without triggering any recaptured depreciation or capital gain.
  • This rollover of depreciable property can occur if the following conditions are met:
    1. the property is Canadian property
    2. before the transfer, the property was used by the taxpayer, spouse of the taxpayer, parent of the taxpayer or a child of the taxpayer principally in the business of farming in which the taxpayer, taxpayer's spouse or child of the taxpayer was actively engaged
    3. the child is a resident of Canada
For more information, see document on Rollovers.

Year of Transfer/Rollover

  • In the year of transfer (e.g. by Section 85 rollover), the transferor cannot claim CCA as the assets are not owned at the end of the year (even if transfer occurs on the last day of the year).
  • Consider delaying rollover to early in the next year to get CCA for the current year.
Short Fiscal Period
  • In the year of incorporation or initial year of farming, a farmer may have a reporting period that results in a short taxation year for the first year.
  • CCA must then be prorated based on the number of days in the taxation year.
Reserves
  • In the year of disposition, recaptured depreciation may be created.
  • Normally a reserve may be used in a sale where proceeds are due over more than one year; however, a reserve is not available on recaptured depreciation.
Large Trucks
  • A truck or tractor designed for hauling freight and that is primarily so used by the taxpayer or a non-arm's length person in a business that includes hauling freight qualifies as a Class 16 asset. It is depreciated at 40 per cent if the vehicle has a gross vehicle weight rating in excess of 11,788 kg. Many large farm trucks may qualify for this higher depreciation rate.
 
 
 
 
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For more information about the content of this document, contact Joel Bokenfohr.
This document is maintained by Nicole Halvorson.
This information published to the web on July 15, 2014.