How do I claim capital cost allowance (depreciation) on equipment I acquire when I buy a business?

Capital cost allowance (CCA) is the tax deduction for depreciable property, such as equipment you buy with a business. The Canada Revenue Agency (CRA) guidance cited here is written for sole proprietorships and partnerships. It says you group the depreciable property you own into classes, and a specific rate generally applies to each class. The classes are set out in Schedule II to the Income Tax Regulations, and s.1100(1) of those Regulations sets the amount that may be claimed for each. Your accountant assigns the classes, and the glossary entry on capital cost allowance defines the term.

What counts as the cost

The CRA’s guidance says capital cost is generally your full cost of acquiring a property, and is usually the total of items that include the purchase price, not including the cost of land, which is not depreciable. That total also includes the part of your legal, accounting, engineering, installation and other fees that relate to buying the property, again not including the part that applies to land. Where one price covers several assets, ask how it is allocated across them, and get that allocation in writing.

When you can start claiming

Section 13(26) of the Income Tax Act says that, for the CCA deduction, no amount is included in the undepreciated capital cost of depreciable property of a prescribed class for its capital cost (other than a certified production, as defined in the Regulations) before the property is considered to have become available for use, and ss.13(27) to 13(31) set out when that happens. The CRA says you can usually claim CCA on a property only when it becomes available for use. It says property other than a building usually becomes available for use at the earliest of the date you first use it to earn income, the second tax year after the year you acquire it, the time just before you dispose of it, and the time it is delivered or made available to you and is capable of producing a saleable product or service. The CRA also says to base your claim on your fiscal period ending in the current tax year, not the calendar year, and that if your fiscal period is less than 365 days, you have to prorate your CCA claim.

The half-year rule and your choice of amount

The CRA says that in the year you acquire a depreciable property, you can usually claim CCA only on one-half of your net additions to a class. This is called the half-year rule. The CRA’s accelerated investment incentive page says the rule is suspended for certain eligible property, subject to the acquisition and available-for-use dates that page sets out, so ask your accountant whether it applies to what you bought. The CRA also says you do not have to claim the maximum in a given year, and you can claim any amount from zero to the maximum allowed.

If the seller is not at arm’s length

The CRA says that when you acquire depreciable property in a non-arm’s length transaction, there are special rules to follow to determine the property’s cost, and that these rules do not apply if you get the property because of someone’s death. Section 13(30) of the Income Tax Act also deems property to be available for use at the earlier of when you acquired it and, if applicable, a prescribed time, where it had already become available for use by the person you acquired it from and you acquired it in one of the cases the subsection lists, which include buying from a person you were not dealing with at arm’s length. If you may not be dealing at arm’s length with the seller, raise this with your accountant before closing, because the cost for CCA may not be the price on the invoice.

How the price was allocated also matters later; see the answer on the CRA challenging a purchase price allocation.