Whether you own business property or investments, you must have a thorough understanding of the terms and concepts related to their taxation. Two common tax terms related to these assets are “capital property” and “capital cost allowance.”
In these and other tax issues or questions regarding assets, investments, depreciation, expenses, etc., always consult a Toronto income tax lawyer who is licensed to handle all tax matters and knows not just tax laws, but related laws, which can help with more effective tax planning. For now, let’s delve into the basics of capital property and capital cost allowance and why they are essential for Canadian taxpayers.
Canadian Capital Property Explained
Capital property encompasses property that typically yields income over an extended duration, usually longer than a year. This includes tangible assets like buildings, real estate, machinery, and equipment. It also includes investments like crypto, stocks, and mutual funds, and intangible assets like trademarks, copyrights, or patents.
When you dispose of capital property, either through selling it or other means, you may realize a capital gain or bear a capital loss. This difference arises from the selling amount and the property’s “adjusted cost base,” plus eligible selling expenses.
Understanding Adjusted Cost Base (ACB)
The adjusted cost base, commonly abbreviated as ACB, represents the original cost of a capital property, combined with eligible expenses associated with acquiring it, and qualified expenses incurred to increase its value. Correctly calculating the ACB is vital as it forms the baseline against which any future capital gains or losses are determined when the property is disposed of. It’s also necessary to accurately determine and report your capital losses or gains tax owing.
An example of ACB would be if you bought a commercial property for$500,000. Additional costs, such as land transfer tax, legal fees, and inspection charges, totalled$15,000. The ACB for this property would be $515,000. If you made improvements that qualify as capital expenditures to improve its value, like adding a parking structure, the costs would be included as part of your current ACB.
It’s crucial to note that capital costs do not include “current” expenses like utility bills and needed repairs.
Capital Cost Allowance (CCA): What You Need to Know
While business expenses get written off in the year they occur, capital property depreciates over time. This is addressed by the Capital Cost Allowance (CCA). CCA is the way business owners can account for capital depreciation, essentially writing off a portion of the property’s cost each year. Here’s how it works:
- CCA Classes. The Canada Revenue Agency organizes various types of depreciable property into different “classes.” Each class has a specific rate at which the property can be depreciated.
- Determining the Allowance. To determine the CCA for a year, you would apply the class-specific rate to the “undepreciated capital cost” (UCC.) UCC is essentially the capital cost of a property minus any previous CCA claims you’ve made.
- Half-Year Rule. For the year in which a capital property is acquired, only 50% of the CCA is usually claimable. This is commonly known as the “half-year rule.”
As with the ACB, it’s essential to calculate the CCA correctly and according to the Canada Revenue Agency’s (CRA) guidelines. Not doing so can result in a stressful and time-consuming audit and significant fines.
As the regulations regarding capital property and capital cost allowance are complex, always consult a Canadian tax lawyer or CPA when you need to report capital gains, losses, and capital cost allowances.