4.

3 Tax Depreciation
 Accounting depreciation is not deductible for tax purposes
 Instead of allowing a tax deduction for accounting depreciation, act allows taxpayer to
claim capital cost allowance (CCA) on capital assets used to earn business income or
property income
 Tax depreciation rates set to achieve government objectives such as generating tax
revenues and encouraging capital investment
o Similarities with accounting depreciation
 Attempt to write off capital assets over time
 Judgement to determine if expenditure is one of maintenance (fully
deductible expenses) or enhances the life or usefulness of an asset
(capital asset that must be capitalized and written off over time)
o For tax purposes, capital assets are assigned to specific CCA asset classes and tax
depreciation is computed based on the balance in each CCA asset class
 Each CCA asset class has its own CCA rate
 Rate represents maximum CCA that may be claimed per year on
undepreciated capital cost (UCC) of the asset class
 Taxpayer can choose to claim less or zero CCA (cannot claim more than
the maximum)
o Even if taxpayer has losses, claiming CCA which increases amount of non-capital
loss is often beneficial since the non-capital loss can be carried forward or
backward
o Claiming CCA will typically reduce a taxpayer’s income from a business or
property
 In certain circumstances, employee may claim CCA on his/her
automobile if it is used to earn employment income
o Any CCA claimed by taxpayer on a particular CCA asset class will reduce the
UCC of that CCA asset class
o Reduced UCC means the future year’s maximum CCA deductions will
decrease
o Cost of capital asset => all expenditure incurred to acquire the assets
 Refundable taxes are not part of the cost of the capital asset
o Usually, capital assets must be owned by taxpayer at year-end in order for
the taxpayer to claim CCA
 Disposal of asset will reduce UCC balance in particular CCA asset class
which then reduces the amount of CCA that can be claimed
o In the year of an asset’s acquisition, the amount of CCA is typically affected
by the half-net rule
o Amount deducted from UCC of a CCA asset class will be the lesser of
 Proceeds of disposition
 Original cost of the asset
o Maximum CCA allowable = CCA rate x UCC balance in CCA Class
 o If no assets remain in CCA class, no CCA can be claimed (terminal loss possible)
 No assets and positive UCC, positive UCC is allowed as a tax
deduction
 Deduction is terminal loss (reduce CCA asset class to zero)
 Terminal losses can be deduction from business or property
income but not from employment income
 UCC balance of CCA is negative
o Negative amount is added to income as recaptured CCA (or
recapture)
o Recapture => excess tax depreciation that was claimed in
the past
 CCA cannot be claimed until the asset is available to be used for its intended purpose
o The date when the asset is delivered to the taxpayer is when the asset is available
for use
o Building is deemed to be available for use at the earliest of the date that the
building is used for the purpose for which it was acquired and the second
taxation year following the end of the taxation year in which the building was
purchased
o Many costs related to a building, and the land under and surrounding a building,
incurred during construction of the building are not deductible
 Costs are capitalized
 Landscaping and disability-related modifications are deductible in the year
 Expenses up to rental income earned can be deducted by the taxpayer in
the year
o Additions rules exist for transactions with non-arm’s length persons (related
person) and for certain properties disposed of and replaced within a specific time
frame
Half-Net Rule and Short Taxation Years

 half-net rule is adjustment to calculation of CCA during the year that a capital
asset is purchased
o only one-half of the net additions to an asset class i.e. purchases in excess
of dispositions, is added to the UCC balance for the purpose of
calculating that year’s CCA
o the other half is added to UCC after the year-end
 if disposition exceed purchases for particular CCA asset class in a taxation year,
the half-net rule does not apply to that CCA asset class
 half-net rule applies to most but not all capital asset purchases
 daily proration of CCA is required for short taxation years
o proration only applies to CCA on assets used to earn business income or
property income earned by a corporation (does not apply to individuals)
o Short taxation year will also affect small business deduction annual
business limit and the SR&ED expenditure limit
Notes for problem 300
 Salary to owner is deductible in the same way as any other salary or wages to
employees
o CRA does not challenge salaries paid to owner-managers on this basis
 Dividends are not deductible as they are not for the purpose of earning income; no legal
obligation to pay dividends
 Two-convention limit to deductibility does not apply to corporations since they do
not “attend” conventions
 Bruno’s employment contract supports the idea that repairs are part of the compensation
for his labor services
o Recommend pay that same amount as salary to avoid conflict
 Add-backs (non- deductible expenses) are inputted in Schedule 1
 INTEREST shows late filing penalty as well as the interest due
 TSUM shows the taxes owing (personal tax prep)
 SUM shows taxes owing (corporate tax prep)