When reporting income on your annual tax return, it is always advantageous in the short term to claim as many deductions as possible in order to reduce your taxable income, and in turn, your balance of taxes payable. However, there are some things to consider when deciding whether or not to claim a capital cost allowance (CCA) on your tax return.
What is CCA?
CCA is an annual deduction often referred to as depreciation that can be claimed on the cost of certain capital assets (assets acquired in order to generate income). The purpose of this deduction is to spread the cost out over the useful life of the asset.
Is claiming CCA a good idea?
Claiming CCA does an effective job in reducing taxes payable in the short term, but it can cause problems down the road. If you eventually sell your asset, and you receive an amount that is greater than the undepreciated cost (i.e. original purchase price, less any CCA claimed), then you will need to include some or all of the CCA you claimed as income, which in turn increases your taxes payable in that year. This is referred to as recapture.
How do I avoid recapture?
The main question you should ask yourself is whether or not you plan on selling your asset in the future. If you don’t plan on selling it, then you need not worry about recapture, and you can go ahead and claim the CCA. If, on the other hand, you do plan on selling the asset, then you need to think about how much you think you’ll be able to sell it for.
In the case of real estate, values tend to trend upward, so exercise caution when claiming CCA on real estate assets because more often than not recapture will come in to play. Automobiles, on the other hand, are highly likely to drop in value, so there is less risk in claiming CCA.
Give us a call if you have any questions about CCA and asset purchases or sales.
Written by: Melissa McCready