Asset classes are depreciation categories used by the Canada Revenue Agency. When you report capital expenses on a business tax return, the amount of the claim varies based on the class of the asset. Asset classes are also referred to as capital cost allowance classes or depreciation classes, and you need to understand these classes to file tax returns for your business or your clients.
The CRA divides business expenses into two main categories: capital and current. Current expenses refer to costs for items or services a business uses right away, such as pens, utility bills, or rent. Capital expenses are for assets that have a long life span, such as buildings, cars, and computers. When claiming capital expenses on a tax return, you cannot claim the entire expense at once. Instead, you need to claim it slowly over time.
To explain, asset class 1 includes most nonresidential buildings acquired after 1987, and it has a depreciation rate of 4 percent. If your client is claiming an asset that falls into this class, he claims 4 percent of its value as a business expense on his tax return. For example, if he spends $1 million, he claims $40,000 the year of purchase, and continues this pattern for approximately 25 years until he claims the whole amount. In contrast, asset class 50 includes computer hardware, and the depreciation rate is 55 percent. By extension, if your client spends $1,000 on a new computer for his business, he claims $550 the year of purchase. The following year, he claims the remaining amount.
As a general rule of thumb, the CRA’s asset classes are set up so your clients claim the most expensive assets over a longer period of time than less expensive assets, but the classes aren’t exclusively based on the cost of the asset. Rather, the asset class ties to the longevity of the asset. To continue with the above example, a building tends to have a longer useful life than a computer. Because of that, you write off the building in smaller increments than the computer and over a much longer period of time.
Whether you are a full-time accountant or bookkeeper for a small business, you need to understand asset classes. Ideally, you should also be able to explain this concept to your clients so they know what to expect at tax time.