*I am not a tax professional. This is meant to be an educational tool and NOT a recommendation. Each personal situation is different and there’s a lot of grey area in self-employed deductions. If you have questions (even just little ones) … talk to a tax expert.*
Unlike a lot of other deductions, the ‘capital cost allowance’ is one that you might not have heard of… but you’ve probably either used it already, or you really should have.
The CCA (fancy finance talk for Capital Cost Allowance) is for stuff that you buy for your business that lasts for multiple years: like a computer.
Unlike business meals or travel, a computer isn’t something that you buy every year. Its worth to your business is spread out over, hopefully, 3 – 5 years.
So the government doesn’t let you deduct the entire cost of the computer in the first year, because the worth that the computer is giving your business is spread over several years. And so the deduction that the government gives you is also spread over several years.
The specific percentage that you’re allowed to deduct every year is the capital cost allowance.
How do I know whether something is a ‘capital cost’?
The best way is just to call your accountant, but since that feels like a cop out, I’ll give you a few tips.
The CRA has a whole list of factors on its website HERE, but it’s the kind of list that I read and am left feeling like I still have no idea what counts as a capital cost.
I loved this rule from Save, spend, splurge specifically about which office expenses count as capital:
“If the office expense does not disappear (e.g. furniture, a laptop, a printer), it is not an “Office Expense”, it is considered a Capital Expense, and you need to find the Capital Cost Allowance (CCA) class for it and expense the item’s depreciation.”
You can find exceptions to this rule (don’t be that person), but it’s a good way to conceptualize it.
The CCA generally applies to the big stuff that you spend more money on and lasts longer than a year. If you think you’ve got something that might apply… talk to an accountant.
How to deduct a capital cost?
This deduction dips into super nerdy tax territory, so if you’re squeamish about formulas and tax talk… turn back now.
But for those of you who want to see how the tax sausage is made…. read on.
The concept is simple. Assets that last longer than a year are deducted over multiple years. But not all assets are the same. Some last longer than others.
That’s why the CRA has created a bunch of classes to help categorize different assets and tell us how to deduct them in different ways.
Each class breaks down what percentage you can deduct per year.
They have another thoroughly unhelpful chart for this that you can check out HERE.
But I found this chart, specifically written about blogger expenses, much more helpful (it’s not comprehensive, but it’ll give you an idea of how classes work):
“Cameras and Video Recording Equipment: Class 8 costing $500 or more, otherwise it goes under Class 12
Photocopiers, Printers, Fax Machines, and Telephones: Class 8
Laptops: Class 50
Furniture: Class 8
CDs, Discs, Computer Software, Accounting Software (like TurboTax or UFile if you use either to do your taxes): Class 12 — but not for things like Microsoft Windows because it’s an “operating system” and not a computer software
Microsoft Windows Operating System Computer Software: Class 52 Class 50 (some say iPhones qualify under this rule because you use it to “monitor and handle data” but you can use your own discretion for this to put it under Class 50 or Class 8)”
You might need help from a tax pro to find where your expense fits, but rest assured there’s a class for everything.
I’m confused and angry… how does this thing actually work?
I understand. I typed those words not for you… but for me.
Let’s look at an example and define some other important words as we go along.
Let’s say I bought a laptop last year.
My laptop is going to help me earn income for the next few years, and so I figure it’s a capital expense and need to use the CCA deduction on my taxes.
One important thing to define before we start (I mention it, but it deserves a bit more explanation): THE HALF YEAR RULE applies to laptops. It means that you’re only allowed to deduct HALF of your allowed percentage for the first year. Why? Because the CRA can’t know when you bought that computer… did you buy it in January and have used it for a year? Or did you buy it on December 30th and it’s pretty much brand new?… so they split the difference and assume you bought it right smack dab in the middle – leaving you with 50% of a full year’s deduction.
Ok! Now on to what will become the world’s least viewed infographic!
How’s my math? If you find a mistake you win one quart of my tears!!!!