Understanding Capital Assets and Depreciation for Canadian Small Businesses - Part 1

When you run a small business in Ontario, you’ll often need to buy long-term assets — equipment, furniture, vehicles, or even a building. These purchases are different from everyday expenses and must be tracked and reported carefully in your books.

That’s where capital assets and depreciation (or Capital Cost Allowance – CCA) come in.

What Are Capital Assets?

Capital assets are items your business buys that will provide value for more than one year. Common examples include:

• Machinery and tools
• Office furniture and equipment
• Vehicles
• Buildings

Because these assets are used over time, they aren’t deducted as a one-time business expense. Instead, you recover their cost gradually through depreciation.

Recording Capital Assets

Whenever you purchase a capital asset, keep a clear record of:

• The purchase date and cost
• A description of the asset and how it’s used in your business
• Its category (e.g., machinery, furniture, computer equipment)
  
  

This information ensures you apply the right tax treatment and can prove the asset’s value later if needed.

What Is Depreciation?

Depreciation is an accounting method that spreads the cost of an asset over its useful life. It reflects the fact that assets lose value as they’re used.

In Canada, businesses apply depreciation for tax purposes through Capital Cost Allowance (CCA).

What Is Capital Cost Allowance (CCA)?

CCA is a tax deduction that allows Canadian businesses to write off the cost of certain assets over time. Instead of claiming the full purchase price in the year of purchase, you deduct a portion each year based on CRA rules.

For example:

• Computers: 55% (declining balance)
• Vehicles: 30%
• Furniture: 20%

This approach reduces your taxable income in a fair, structured way.

Determining Capital Cost

The capital cost of an asset usually includes:

• The purchase price (excluding land, which isn’t depreciable)
• Legal, accounting, installation, and engineering fees related to the purchase
• Improvements made after acquisition, if not already deducted as current expenses
• For buildings: certain “soft costs” like interest, legal fees, or property taxes incurred during construction or renovation

CCA Example

Suppose you purchase manufacturing equipment for $10,000, which falls into a class with a 30% CCA rate.

• Year 1 claim: $3,000 (30% of $10,000)
• Remaining balance (Undepreciated Capital Cost – UCC): $7,000
• Year 2 claim: 30% of $7,000 = $2,100

Over time, the balance gets smaller — which is why this method is called declining balance. In Part 2, we’ll dive deeper into CCA classes, the half-year rule, accelerated CCA, and what happens when you sell or dispose of assets (recapture and terminal loss).