Depending on your type of business, you may have to renew your small business’s computers and electronics regularly. Since equipment and software are often considered as capital expenditures for tax purposes, you cannot simply deduct their cost from your income. Instead, you must apply the rules regarding depreciable assets and claim the capital cost allowance in your tax returns.
How Depreciation Works
The first distinction you need to make is the difference between a capital expenditure and a current expenditure. Current expenditures are those that are made for immediate use and consumption. Rent, power, office supplies and salaries are all current expenses and, as such, are fully deductible in the year when you incur them.
Capital expenditures are made with a view to acquiring goods that will be used in your business for a long time. Buildings, plant equipment and furniture are all good examples of capital expenditures.
Computers and electronics can be a little bit more difficult to place in a category. While there is little doubt that a commercial scanner and photocopier is a capital expense, modern mobile phones and laptops do not always have a long useful life. As a taxpayer, it is your obligation to make the determination in light of your specific type of business. If your decision is reasonable and justifiable, the Canada Revenue Agency should not be able to change it. When in doubt, consult with the CRA or a tax advisor before filing your taxes.
Once a good has been classified as a capital expenditure, it may be deducted using the deduction for capital cost allowance. The tax laws have separated goods into categories with percentages that aim to mirror the typical useful life of the elements in that category. That percentage is the deduction you can take.
Categories for Computers and Electronics
Different types of electronic equipment has been placed in different categories. However, with equipment constantly changing, there is some room for interpretation . The most frequent ones are:
Category 8 (20 percent depreciation): Photocopiers, fax machines and telephone equipment. This includes mobile phones but probably not tablets.
Category 12 (100 percent depreciation): Computer application software. This includes frequently used software, such as Microsoft Office, Intuit QuickBooks and other similar programs.
Category 46 (30 percent depreciation): Data network infrastructure equipment that supports advanced telecommunication applications. This category is used for routers, server infrastructure, firewalls and other common hardware.
Category 50 (55 percent depreciation): This category is the general-purpose computer equipment category. Everything that cannot be classified elsewhere probably fits in here. This category includes desktops, laptops, tablets, monitors and printers, along with operating software.
In the first year when any good is acquired, it can only be deducted at half of the rate above.
The capital cost allowance deduction is optional, so if you do not need it during a given year, you don’t have to use it. The deductible amounts simply carry over to the next year.