Last updated: Aug. 16, 2023
If you need to purchase a major capital asset, such as a building, machinery, or equipment to use in your farming business, consider buying it before the end of the fiscal year. Doing so can help you claim tax depreciation, or capital cost allowance (CCA), which reduces your taxable income.
What is capital cost allowance?
Farm owners and agricultural producers can deduct certain expenses they incur to earn income. This includes many different expenditures, from the cost of feed to building repairs. Find out exactly what you can deduct on your tax return as a Canadian farmer.
However, if you’ve purchased a fixed asset with a long-lasting life for your business, such as a tractor or silo, you cannot deduct the entire cost as an expense in a single taxation year. Since fixed assets wear out over time, they are considered “capital.” Their cost can be deducted over a period of several years using CCA.
Capital cost allowance is the portion of the asset the Canada Revenue Agency (CRA) allows you to deduct as depreciation on your tax return each year. You can only deduct it from assets available for use at the end of the fiscal year. If you purchased an asset, but it isn’t available for use, you can’t claim CCA in that tax year.
For example, if you buy a combine that hasn’t been manufactured yet, it wouldn’t be eligible for CCA since it isn’t available for use.
You don’t have to use the item during the fiscal year in which you purchased it, but it must be delivered or made available to you during that year. It must also be capable of performing the function you bought it for.
Capital Cost Allowance: How much can I claim?
The amount of CCA you can claim depends on the type of property you own and when it was acquired. The CRA categorizes fixed assets into different classes, and each class has its own depreciation rate. For example:
- Silos are considered Class 8, which means you can deduct up to 20 percent each year.
- Tractors, trailers, and trucks are typically considered CCA class 10, which allows for 30 percent CCA.
You’re not required to claim the maximum amount of CCA in any given year. You can claim the amount you would like, from $0 to the maximum allowed for the year. This is an ideal opportunity to take stock of your tax position and decide if you should claim CCA.
If you don’t have to pay income tax for the year, you may not want to claim CCA because it reduces the balance of the class by the amount of CCA you claim. As a result, the amount of CCA available for you to claim in the future will be reduced. In this case, you could save the CCA for future years when your tax bill is higher.
If you purchased a fixed asset during the current fiscal year and you’re hoping to reduce your income, you can take advantage of the Canadian government’s accelerated investment incentive.
There are different rules and classes depending on the asset, its use, and its value. We recommend talking to an experienced tax specialist to determine the optimal application for this deduction.
What’s the accelerated investment incentive?
The accelerated investment incentive offers an enhanced first-year allowance for certain properties that must adhere to CCA rules. This means that if you purchased a property (qualified equipment or a vehicle) after Nov. 21, 2018, and available for use before 2024, it’s eligible for a higher rate of CCA. You can claim 150 percent of the normal CCA rate in the year of purchase. This program is in effect until Dec. 31, 2023.
According to the CRA, this incentive is generally made up of two parts:
- The correct CCA rate is applied for a class up to 1½ times the net addition to the class for the year.
- The CCA half-year rule is suspended for Canadian vessels and Class 13 properties.
For example, if you bought a $100,000 silo in 2021 to replace your previous silo, and it’s available for use, you created an additional $100,000 in eligible property in 2021. This means that your undepreciated capital cost (UCC) in the 2021 tax year is $32,000, which is the balance of the silo left for further depreciation.
During this process, you decide to sell the old silo. With proceeds of $5,000 from the sale of the previous silo and a purchase of $100,000 for your new silo, the net additions are $95,000. Since farming equipment qualifies for the accelerated investment incentive, you can take advantage of the temporary accelerated CCA rate. The incentive suspends the half-year rule that eligible property is normally subject to, providing for an accelerated CCA rate of 150 percent in the year you acquired the silo.
The UCC is adjusted using the CCA calculation, giving you a base amount. In this example, the net additions ($95,000) plus the additional 50 percent of the net additions ($47,500) plus the UCC opening balance ($32,000) gives you a base amount of $174,500.
The CCA rate for the silo is 20 percent, which is applied to the adjusted UCC. (0.20 ✕ $174,500 = $34,900) You then subtract the CCA number ($47,500) and the CCA rate ($34,900) from the base amount ($174,500), giving you $92,100 that’s available for depreciation in 2022.
Please note: This is a simplified example. Make sure to contact a tax specialist to discuss how you can take advantage of the CCA for your farm business.
What if I want to sell my fixed assets?
If you have depreciable assets to sell, it may be better to wait until the next fiscal year to do so. This delay will allow you to claim another year of CCA during the current tax year.
However, any gains accrued on the fixed asset will also be included in your income the following year, and the CCA will be reduced by deducting the sale’s proceeds. It’s best to speak to a tax specialist to understand your options and decide which strategy is right for you.
What if I need to repair my fixed assets?
To claim any repairs, you must first determine if the cost of the repair is a current or capital expense.
- A current expense would typically occur after a short period of time; for example, painting a wooden fence or property would qualify as a current expense.
- A repair is a capital expense if it offers lasting benefits or improves the repaired item beyond its original condition. For example, if you place vinyl siding on the exterior walls of a wooden property, you’re essentially extending the useful life of your property.
You must include capital expenses in your CCA for that fixed asset.
What if I buy property used for both personal and business reasons?
If you purchase property that you use for both business and personal reasons, such as a passenger vehicle, you must calculate the portion of the property used for business purposes. Then, you must claim it in the CCA section on your T2042 Statement of Farming Activities.
Let’s look at the following example. (It’s helpful to have page 5 of Form T2042 open while you read this.)
You bought a car in 2022 that you use for both business and personal use. The total cost—including fees and taxes—is $68,000. Your car falls under CCA Class 10. This allows for 30 percent CCA but only on the portion used for business purposes. You determine that you used 21,000 out of 46,000 km for business purposes. Assuming that you didn’t sell another vehicle during this year, the CCA calculation on the new car would be as follows:
- Enter $68,000 into column 3 of “Area A – Calculation of capital cost allowance (CCA) claim.”
- Enter $68,000 into column 3 and column 5 of “Area B – Equipment additions in the year.”
- By completing the remaining columns in Area A, you calculate a CCA Class 10 claim of $10,200. However, since only a portion of vehicle usage was for business purposes, you must calculate that amount: 21,000 business km/46,000 total km ✕ $10,200 CCA = $4,656.52 allowable CCA for business use.
- Enter $4,656.52 into Line 9936 (Part 4 Net income (loss) before adjustments, page 3 of Form T2042).
We recommend working with an experienced tax specialist to work through any accelerated investment incentives and to determine the appropriate classes and application of CCA.
We have worked with Canadian farmers, livestock producers, and agri-businesses for over 70 years to optimize their tax returns and help them keep more money at the farm gate.
If you want to learn more about tax credits and other tools to help lower your tax burden, please download our e-book Tax Preparation: A toolkit for farmers and agricultural producers.
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