CCA: Creatively Claimed Allowances
By: Ken Lee | KLee Tax and Financial Services Co.
Published: 2 June 2025 4:00AM EST (Updated 2 June 2025 4:01AM EST)
Photo Credit: McNabb Lucuk LLP
All references to the ‘Act’ mean the Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended. All references to the ‘Regulations’ mean the Income Tax Regulations. The following should not be construed as legal nor tax advice. Consultation with your usual tax/legal professional is advised.
Good morning Toronto! Businesses make up the backbone of the Canadian economy. Behind every successful business is a strategy for managing costs – like taxes. Today, we will explore one of the more valuable tools for the owner-manager: the Capital Cost Allowance.
To provide a backgrounder on the taxation of businesses, it is important to discuss how businesses are taxed in Canada. Generally, there are two main groups of businesses in Canada:
- Unincorporated. These businesses are directly ‘tied’ to the taxpayer(s). This includes sole proprietorships and some partnerships. Business income is reported on Form T2125: Statement of Business or Professional Activities> which is filed with the T1 Personal return. In other words, the business and the individual are taxed as a whole.
- Incorporated. These are separate legal entities, called corporations. The corporations file a T2 Corporate Return, separately from the owners.
Regardless of structure, businesses are allowed to (and should) deduct all operating expenses, such as wages, supplies, etc. In the course of carrying out such business or professional activities, businesses may acquire depreciable property such as vehicles and machinery. Because these depreciable properties, as the name suggests, depreciate over time, Revenue Canada mandates that the business can only deduct a certain amount of the depreciable property’s value each year. This concept is called the Capital Cost Allowance (CCA). Should this be the case, the business is NOT allowed to deduct the full amount of the depreciable property, unless a covered exemption applies to them.
For simplicity, we will refer to depreciable property as “property” and use the term “business” to refer to both individual taxpayers and corporations, regardless of legal structure.
Schedule II of the Regulations sets out specific ‘classes’ of property which the government considers to be depreciable at relatively similar rates. Likewise, §1100(1) of the same Regulations assigns each class a maximum CCA deduction rate, which determines how much of the property’s cost can be deducted each year. Some classes which commonly apply to businesses are:
| Class | Deduction Rate | Assets Included |
|---|---|---|
| 8 | 20% | Furniture, appliances, and tools costing over $500 each. |
| 10 | 30% | Computer hardware, computer software, and vehicles (unless the vehicle can be included in 10.1.)* |
| 10.1 | 30% | Passenger vehicles* that cost under the capital cost limit ($38,000 pre-tax for vehicles acquired in 2025) |
| 12 | 100% | Tools, medical/dental instruments, and kitchen utensils that cost under $500 each. |
| 16 | 40% | Vehicles used as taxis, in a rental car business, or as freight trucks. |
| 43 | 40% | Machinery and equipment used in Canada to manufacture/process goods |
| 53 | 50% | Class 43 property (see above) that was acquired between 2016-2025 inclusive. |
| 54 | 30%** | Zero Emission Vehicles** normally included in Class 10/10.1, that cost under the capital cost limit ($61,000) |
| 55 | 40%** | Zero Emission Vehicles** normally included in Class 16 |
*§248(1) of the Act defines that a passenger vehicle is a vehicle which is ‘designed/adapted’ to carry no more than 8 passengers and a driver on streets and highways. Vehicles that do not meet this standard (i.e., primarily carry goods) are classified as motor vehicles.
**ZEVs are plug-in hybrid (battery capacity >7kWh), fully electric, or hydrogen-powered vehicles that were acquired new AND before 2028. These vehicles also receive an enhanced first-year deduction, which allows the business to deduct 75% of the value for vehicles acquired in 2024/2025, and 55% for 2026/2027.
To calculate the CCA, the business must first calculate the property's capital cost, which is the sum of:
- The property’s purchase price AND
- Any professional or like fees which apply to buying/constructing/installing the property AND
- The cost of any improvements/additions made to the property (assuming these costs were not already deducted as an operating expense on another portion of the T1/T2 return)
By totalling the above, the result is the Capital Cost of the property. As a general rule, when CCA is claimed for property bought during the fiscal year, the Act only allows businesses to deduct one-half of the normal maximum CCA deduction of the property, forming the so-called half-year rule (HYR). However, this rule does NOT apply to most Class 12 property AND Class 54/55 vehicles.
Generally, to calculate the CCA deduction for the next tax year, the business would reduce the property’s Capital Cost by any CCA deduction claimed to get the Undepreciated Capital Cost (UCC), which represents the leftover value of the property that can be ‘written off’ in future tax years. On that note, the business is NOT obligated to claim the full CCA deduction if they so elect not to, which would be advantageous when net income is little to none, or if the business is anticipating a larger tax liability in the future.
Example 1
Sophie owns a bakery. She buys a fridge on 1 July 2024 to store her wet ingredients, which cost $9.5k, for which she spent another $500 on installation. She also buys a professional-grade mixer stand, costing $450.
- The fridge falls under Class 8 (20%), while the stand falls under Class 12 (100%)
- Sophie’s Capital Cost is $10k and $450 for the fridge and mixer stand, respectively.
- For the 2024 tax year, Sophie is subject to the HYR on the fridge, hence, she is limited to deducting 10% of the Capital Cost (50% x 20%). She is NOT subject to HYR for the mixer.
- For the above tax year, she can deduct a maximum of $1k and $450 for the fridge and mixer, respectively. She chooses to deduct the full value of the mixer and $500 of the fridge.
- The UCC for the mixer is now $0, and $9.5k for the fridge, which reflects her election to not deduct the maximum CCA amount.
- In the 2025 tax year, Sophie is entitled to deduct a maximum of $1.9k – the maximum 20% of the 2024 CCA. 2025’s UCC is now $7.6k.
Furthermore, generally, when a business has properties of the same class, the values are ‘pooled’ together into the same class. This does NOT apply to Class 10.1. As property is bought, its capital cost is added to the pool’s UCC. Likewise, when assets are sold, the lower of the following is subtracted from the UCC of the pool:
- The sale price (less any expenses related to disposition) OR
- The original Capital Cost of the property
CCA is calculated and deducted at the end of the 12-month fiscal period, AFTER all additions or dispositions of property within the period.
Example 2
Victoria is a self-employed researcher. In 2024, she buys two electron microscopes for $15k each. Later, in 2025, she sells one of the microscopes for 10k (incurring a $500 selling commission) in the same year. She deducts the maximum allowed each year. Her fiscal year is the calendar year.
- The microscopes belong to Class 8, with a maximum 20% CCA deduction rate, subject to HYR provisions.
- At the end of 2024, she claims the full $3k of CCA (50% x 20% x 30k), so her UCC is $27k.
- After selling the microscope, the pool's UCC is $17.5k ($27k - $9.5k).
- She then claims $3.5k of CCA on the pool, hence UCC is $14k.
In Example 2, Victoria was able to claim more CCA than if she only had one microscope from the start. Because there was still property in the class, the pool remained open. In these cases, UCC continues to be carried forward for future CCA calculations. However, if all property in the class is disposed of, then all disposition proceeds would be subtracted from the UCC of the class*.
- If this result is positive, it is a terminal loss**, which is deductible from business income.
- If this result is negative, it is a CCA recapture**, which is added to business income
*Generally, when a business disposes of all property in a class and does not acquire more property in that class before the end of the fiscal year, it CANNOT claim CCA for that year.
**Class 10.1 vehicles do NOT claim terminal loss or CCA recapture, regardless of selling price.
This scenario is common when a business is winding down and liquidating its assets, or if the class is no longer needed by the business. Additionally, if the fiscal year is shortened, such as if a business is started or dissolved, then CCA is prorated based on the number of days in the fiscal period, divided by 365.
Example 3
Taj recently bought a competitor's dealership on 1 January 2025 and intends to replace the vehicle’s service fleet with electrified vehicles. The dealership’s fiscal year aligns with the calendar year. They currently own 1 Class 10.1 and 3 Class 10 vehicles with a total UCC of $60k and $10k entering the fiscal year, respectively. During the year, the Class 10.1 vehicle is sold for $5k, and the Class 10s are sold for a total of $50k.
- Because they do not acquire more Class 10 vehicles, the business cannot claim any CCA.
- After subtracting the sale price from the UCC, the result is $10k. This is a terminal loss, so the business can deduct $10k from its income during the year.
- There is no terminal loss or CCA recapture applicable to the sole 10.1 vehicle.
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