Today, C is for Capital Cost Allowance. Three letters down, 23 to go!
WHY DID THEY HAVE TO INVENT THE CCA TERM
Capital Cost Allowance (aka CCA to its friends) is a perfect example of why the drafters of the Income Tax Act sow needless confusion by using three legal words to describe one accounting term: depreciation. Because that's exactly what CCA is, tax deductible depreciation which will reduce your net income due to you having purchased capital items for the purpose of earning income.
It takes long enough for any of us to learn accountant-speak. Why should we then have to learn yet another language: tax law-speak? Because the government says so, full stop.
Don't ask me why the government in its wisdom decided to change the name of depreciation to CCA for tax purposes. There was probably some meeting in some Ottawa boardroom at the Department of Finance (bereft of even coffee and muffins, because we in government were always told such things were an extravagance, notwithstanding other waste). A few plain language folks with common sense may have been fighting a rear guard action in defence of using the term "depreciation," but alas the Assistant Deputy Minister had his heart set on Capital Cost Allowance. He thought it sounded modern, and sexy, and unique. And so CCA was born.
WHY CAPITAL VERSUS OPERATING EXPENSES ARE DEBATED AT THE TAX COURT
You'll mostly have two kinds of expenses to claim on your tax return to reduce your self-employed income: operating and capital. Operating expenses you can usually claim at 100% in the tax year they're incurred. They constitute things like rent, utilities, pencils and salaries.
By contrast, capital expenses need to be depreciated, because they're supposed to last you for longer than just the year you bought them in. Vehicles, computers and desks are all capital items.
There are lots of CRA fights over whether expenses are capital or operating. Fights that can means hundreds of thousands of dollars of difference in business taxes payable. Fight caused by issues like the taxpayer claiming engine replacement in mining trucks as an operating expenses fully deductible in the year incurred because it was simply a repair, and the CRA claiming them an improvement which required multi-year CCA.
WHY BOATS OUTLIVE PLANES WHICH OUTLIVE CARS
The most important thing to know about CCA is that it varies greatly by "class" of asset. For instance, you get 15% per year CCA on boats placed in Class 7, an improved 25% on aircraft residing in Class 9, and a princely 30% on automobiles. The theory is that planes last longer than cars, but shorter than boats. Not sure if that's true, but that's what the government's decided, so we're stuck with it.
WHY BUYING IN DECEMBER IS ALWAYS BETTER THAN JANUARY
The second most important thing to know about CCA is that you only get to claim half of it in the year you acquire the capital item. This is known as the Half Year Rule. So that 25% deduction on your new Learjet becomes only 12.5% in its first year. Thus picking up capital items in December (where you can effectively claim for six months but only own for one month) is a far better idea than in January (where you're again stuck with a six month claim, even though you'll own for the entire year).
WHY DEFERRING TAX IS BETTER THAN PAYING IT
Last in the CCA greatest hits list is that you need to beware of "recapture," where if you sell a capital item for a value greater than its remaining undepreciated value, you'll have to pay tax on the difference between the remaining undepreciated value and the sale price up to a maximum of the original acquisition price.
This can be a particularly touchy issue for buildings. While they depreciate at a few percent per year, in reality their resale price may keep going up and up, meaning you'll pay tax later on all that depreciation you've claimed - but deferring tax until later is still a good thing, even if you can't avoid ultimately it.
Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.