Last updated: Oct. 26, 2021
If you need to buy a major capital asset like a building, machinery or equipment to use in your farming business, consider buying it before the end of your fiscal year to claim tax depreciation, or capital cost allowance (CCA), to reduce your income on your tax return.
What is capital cost allowance?
Farm owners and agricultural producers can deduct certain expenses incurred to earn income. This includes everything from feed to building repairs. Find out exactly what you can deduct on your tax return as a Canadian farmer.
But if you purchase a fixed asset with a long-lasting life in your business (like a tractor or silo), you can’t deduct the entire cost as an expense in one taxation year. Since fixed assets wear out over time, they are considered “capital” and you can deduct their cost over a period of several years using CCA.
The CCA is the portion of the asset the Canada Revenue Agency (CRA) will allow you to deduct as depreciation on your tax return each year.
CCA can only be deducted on assets available for use at the end of your 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: let’s say you buy a combine in the fall, but it hasn’t been manufactured yet. It wouldn’t be eligible for CCA since it’s not available for use yet.
You don’t have to use the purchase in the fiscal year you acquired it, but it must have been delivered or made available to you and capable of performing the function you bought it for.
How much CCA can I claim?
It depends on the type of property you own and when you acquired it.
The CRA groups fixed assets into different classes, and each class has its own depreciation rate. For example:
- Silos are a Class 8, which means you can deduct up to 20% each year
- Tractors, trailers and trucks are typically considered Class 10 which allows for 30% CCA
You don’t have to claim the maximum amount of CCA in any given year. You can claim the amount you’d like, from zero to the maximum allowed for the year. This is a good opportunity to take stock of your tax position and if it would benefit you to claim CCA.
If you don’t have to pay income tax for the year, you may not want to claim CCA since it reduces the balance of the class by the amount of CCA claimed. As a result, the amount of CCA available for you to claim in future years will be reduced. In this case, you could save the CCA for future years when your tax bill is higher.
If you’re hoping to bring down your income, and you purchased a fixed asset in the current fiscal year, 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 a tax specialist to determine the optimal application for this deduction.
What is the accelerated investment incentive?
If the property (qualified equipment or a vehicle) is purchased after November 21, 2018, and available for use before 2024, it’s eligible for a higher rate of CCA. You can claim 150% of the normal CCA rate in the year of purchase.
This program is in effect until December 31, 2023.
Here’s an example*
Let’s say Tom bought a $100,000 silo in 2021 to replace his previous silo and it’s been manufactured and is available for use.
He’s created an addition of $100,000 in eligible property in 2021. His undepreciated capital cost (UCC) in the 2021 tax year is $32,000, which is the balance of the silo left for further depreciation.
He disposed of the old silo. So with a proceed of $5,000 from the sale of the previous silo, and a purchase of $100,000 on his new silo, the net additions are $95,000.
Since equipment qualifies for the accelerated investment incentive, he takes advantage of the temporary accelerated CCA rate. The incentive suspends the half-year rule that eligible property is normally subject to and provides for an accelerated CCA rate of 150% in the first year the silo is acquired.
The UCC is adjusted with the CCA calculation giving Tom a base amount of $174,500 ($95,000 net additions + $47,500 [additional 50% of the net additions] + $32,000 UCC opening balance = 174,500).
The CCA rate for the silo is 20%. The 20% is applied to the adjusted UCC. (20% x $174,500= $34,900) So Tom subtracts the CCA number from the base amount, along with the accelerated CCA rate, giving him $92,100 available for depreciation in 2022.
*Note: this is a simplified example. Contact a tax professional 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 new fiscal year. The delay lets you claim another year of capital cost allowance (CCA) in the current tax year.
However, any gains on the fixed asset will also be included in your income in the following year, and the CCA will be reduced by deducting the proceeds of sale. It’s best to speak to a tax professional to strategize on which option is right for you.
What if I need to repair my fixed assets?
You must first determine if the cost of the repair is a current or capital expense.
- A current expense is one that would typically reoccur after a short period – such as painting a wooden fence or property.
- A repair would be a capital expense if it gives a lasting benefit or improves it beyond its original condition. For example, if you placed vinyl siding on the exterior walls of a wooden property, you are extending the useful life of your property.
Capital expenses must be included in your CCA for that fixed asset.
What if I buy property for both personal and business use?
If you purchase property that is used for both business and personal use (such as a passenger vehicle), you would have to calculate the portion of the property used for business purposes and claim it in the CCA section on your T2042 Statement of Farming Activities.
Here’s an example (note, it will be helpful to have page 5 of Form T2042 open while you read this):
- Thomas bought a car in 2021 that he uses for both business and personal use. The total cost (including fees and taxes) is $68,000. His car falls under Class 10 which allows for 30% CCA but only on the portion used for business purposes. He determines that 21,000 out of 46,000 total km were used for business purposes. Assuming he did not sell another vehicle in 2021, his CCA calculation on the new car would be as follows:
- $68,000 will be entered into column 3 of “Area A – Calculation of capital cost allowance (CCA) claim”
- $68,000 will also be entered into column 3 and column 5 of “Area B – Equipment additions in the year”
- By completing the remaining columns in Area A, he calculates a CCA claim of $10,200. However, since only a portion of the vehicle was used for business purposes, he must further calculate that amount. He does that as follows:
- 21,000 business km / 46,000 total km × $10,200 CCA = $4,656.52 allowable CCA for business use. This amount will be entered into Line 9936 (Part 4 Net income (loss) before adjustments, page 3 of Form T2042)
We recommend working with a tax professional to determine the classes and application of CCA to lower your income taxes.
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Engaging in tax planning now allows you to get organized and assess what cost-saving actions you can take before tax year-end to lower your future business or corporate taxes next spring.
Consider this toolkit your roadmap to help you get organized, reduce your tax burden, and keep more money in your pocket. In here you’ll find some of the most successful year-end tax planning strategies we employ for our tax Members who farm or own agribusinesses.
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