When you can write off business expenses in the year they incur, your tax return may feel simple. But what do you do with capital expense? These expenses must be depreciated, or written off incrementally over a period of several years, and their tax treatment is more complicated. The Canada Revenue Agency (CRA) divides capital expenses into several categories, each of which has its own special depreciation rate.
Depreciation of Buildings
Buildings and their major components, such as electrical wiring, HVAC systems, and elevators, fall into class one, which has a capital cost allowance rate of 4%. This means you write off 4% of the purchase price each year. It takes 25 years to claim the whole expense.
For example, if you pay $500,000 for a building for your business, you may claim $20,000 during the first year as well as during each of the following 24 years. There are some exceptions to this rule, such as corrugated steel buildings, which fall into class six with a rate of 10%.
Furniture, Appliances, and Tools
If you buy a new desk, a refrigerator for your restaurant, or a tool worth more than $500, those expenses fall into class eight. This class, which also includes displays and fixtures, machinery, and outdoor advertising signs, incurs a 20% capital cost allowance rate. At this rate, it takes approximately five years to write off the expense. If you sell the asset before you finish writing off the expense, the CRA has special rules for reporting the disposition and claiming the remaining capital cost allowance.
CRA Vehicle Depreciation Rates
Vehicles purchased for your business fall into class 10, which has a rate of 30%. In some cases, vehicles fall into class 10.1. This subclass has the same rate, but it uses different rules for the treatment of GST. In general, if you purchase a $10,000 vehicle for your business, you may claim $3,000 as your capital cost allowance during the year of purchase, regardless of whether the vehicle falls into class 10 or 10.1.
Computer Equipment Depreciation Rates
Like vehicles, computers also fall into class 10 with a rate of 30%. System software also falls into this category. For example, if you buy a computer for your business, you can write off the cost of the hardware and any additional costs for the operating software under this category.
Uniforms, Tools, and Computer Software
Software other than operating software typically falls into class 12. This category contains a mixture of other items including dishes, cutlery, dies, and jigs. Although these items are considered capital assets, you can write off 100% of the cost in the year of purchase as long as the cost per item is less than $500.
If you purchase manufacturing machinery or equipment, it falls into class 29 or 43. Class 29 applies to purchases made after March 18, 2007 and before 2016. You may write off 25% the first year, 50% the second year and 25% the third year. Manufacturing equipment purchased outside those dates falls into class 43 and receives a steady rate of 30% until you’ve written off the entire expense.
Understanding your company’s finances is essential. You need a clear picture of incoming income and outgoing expenses. 4.3 million customers use QuickBooks. Join them today to help your business thrive for free.