Writing off Business Assets

When compiling year-end financial statements, or preparing a personal tax return, it is common for us to discover that a client has grouped capital asset purchases with various categories of operating expenses. A common error is the inclusion of computer equipment with office or computer supplies.

The Canada Revenue Agency (“CRA”) has strict rules regarding the write-off of capital assets. In simple terms, a Capital asset is an asset, such as a computer, desk, or a building, whose useful life will extend beyond one year. Unlike general office supplies, or an advertising expenses, which is generally incurred and utilized within a short period of time, a capital asset must be written off over a number of years.

Therefore, the CRA ‘classifies’ assets into like groups and allows taxpayers to write-off these capital assets based on the percentage associated with each class. This write-off is called Capital Cost Allowance or CCA.

A simple example is the purchase of a piece of office furniture, such as a desk. A desk falls under Class 8 and has an annual write-off of 20%.

However, there is one additional consideration regarding CCA in the year an asset is purchased. The CRA imposes another rule called “the half-year rule” which reduces CCA in the year of purchase by 50%. Therefore, continuing with the above example, if a desk were purchased by a Company for $1,000, the eligible write-off the first year would be $100. This is 50% of the allowable 20% CCA rate. Therefore, the second year would provide for a write-off of 20% of the remaining $900 asset balance (the purchase price of $1,000, less the $100 write-off taken in the first year), which would provide for a $180 write-off.

To learn more about Capital Cost Allowance and how to maximize your write-offs relative to capital asset purchases,
please give us a call.

NOTE: The Shannon & Company 'Tips' are NOT intended to cover all tax issues. You should talk to your Shannon & Company professional before making any decisions regarding the information found here.


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