Learn how different business purchases affect your tax return.

Current expenses are always deductible in the year you buy them–they are the necessary purchases that keep a business going day-to-day, like rent, office supplies and advertising.

Some higher-value items, such as computers, furniture and equipment, are not “used up” when you buy them. They are considered asset purchases or long-term investments into a business rather than a general business expense since they benefit the business for more than a year.

How do these purchases impact my taxes?

When it comes to taxes and business expenses, the general rule is that if it’s related to earning business income, you can claim it on your tax return!

However, current expenses and larger value business purchases are reported differently and impact your taxes differently. Since these larger value business purchases benefit your business for a longer term, they also benefit your tax return for several years.

Here’s How It Works

These more significant value business purchases are called “capital property.” You don’t claim the total amount of a capital property in the tax year of purchase. Instead, you claim a percentage of the purchase cost year over the property's approximate expected life or use. This annual claim is called a Capital Cost Allowance (“CCA”). The CRA has a list of CCA classes determining the annual percentage to be claimed. You can find the list of CCA classes here.

In addition, there is a special rule in the year of purchase called the “half-year rule.” This rule states that in the first year, you can only claim 50% of the annual CCA to account for the fact that the asset could have been purchased any time in the year and, therefore, only a true business expense for part of the year. The half-year rule makes it convenient for both taxpayers and CRA because it makes the calculation process of CCA a lot easier, as the actual purchase date of the asset does not matter.

You may think that since you can only claim 50% in the first year, you are “penalized”; don’t worry, what’s not claimed (called “underappreciated”) is available for claim in future years!

Example

Assume you purchased a new business-dedicated MacBook in 2022 to run your business - it is used to manage client bookings, invoicing, bookkeeping, etc. The MacBook cost $1,499 plus HST, in Ontario, of $195 for a total of $1,694. In this first example, you are not registered for GST/HST.

Unlike your other day-to-day expenses, where you would just deduct the total cost (i.e. $1,694) in your 2022 return, you would record the MacBook as a capital property and determine the CCA class to identify the annual percentage claim.

In our example, computers are part of Class 50 with a 55% percentage claim rate. That means the business expense to be claimed is $1,694 x 55% x 50% (don’t forget the half-year rule!).

That's a $466 CCA claim on your tax return to reduce taxable business income in 2022.

Then in 2023, your CCA claim will be ($1,694 - $466) x 55% which is $675.

Below depicts the CCA claim on your tax return for the next five years:

Year Capital Property Cost Undepreciated capital cost CCA rate Half-year rule CCA Remaining cost

2022 1,694 1,694 55% 50% 466 1,228

2023 1,694 1,228 55% n/a 675 553

2024 1,694 553 55% n/a 304 249

2025 1,694 249 55% n/a 137 112

2026 1,694 112 55% n/a 62 50

Now let’s assume you are registered for GST/HST. The calculation of CCA is the same as above, except that the capital property cost is $1,499, not $1,694. Below depicts the CCA claim on your tax return over the next five years:

Year Capital Property Cost Undepreciated capital cost CCA rate Half-year rule CCA Remaining cost

2022 1,499 1,499 55% 50% 412 1,087

2023 1,499 1,087 55% n/a 598 489

2024 1,499 489 55% n/a 269 220

2025 1,499 220 55% n/a 121 99

2026 1,499 99 55% n/a 54 45

But what happens to the $195 in HST you paid? Similar to the HST paid on your other day-to-day purchases, the $195 can be claimed as an Input Tax Credit and reduces the net HST owed to the CRA.

So what are the key things to remember when buying a more significant value item for your business?

Current expenses are the necessary day-to-day purchases that keep your business running; they are 100% expensed in the same year that the cost is incurred to reduce your taxable business income.
Capital properties are larger value purchases that benefit your business for more than a year, like an investment; the cost is spread out over several years to reduce your business's taxable income.

Now that you know the difference between a current expense and a capital property review your tax return to ensure you correctly report your larger value business purchases!

RESOURCES:

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