Most government bodies will have some notion of this concept. In the big picture, this relates to expensing a purchase immediately (hence getting an immediate tax advantage assuming that the entity in question makes money) versus staggering the expense over multiple years. Staggering the expense over multiple years is generally suppose to reflect economic reality. For instance, when you purchase a computer, it is generally used over a longer term period. While the number of years is suppose to reflect, to some degree, economic reality, political policy can sometimes alter basic economic concepts. For instance, the drive to encourage productivity or a green economy (accelerated depreciation/amortization) may override the actual economic life of certain types of equipment.
Revenue Canada
Canada uses CCA classes in order to establish depreciation rates. Rates are available on the Revenue Canada web site. These rates are the basis for companies as well as self-employed individuals and owners of real estate.
What are some specific issues:
1-Terminology: What is the difference between depreciation and amortization? While similar in nature, the term depreciation is generally used for physical goods, while the term amortization is used for non-physical goods (For instance, a patent)
2-While not explicitly allowed (tolerated), companies tend to expense items below a certain $ threshold immediately. It is simply too complex to track certain items even if the asset will last more than a year. However, if the items is an inexpensive adon (example : a cable for a computer) Revenue Canada will typically advise taxpayers to add it on to the cost of the computer.
3-1/2 year rule: As most assets purchased will not be fully used in the first years of their purchase, Year 1 depreciation/amortization rates (and the corresponding $ value) should be multiplied by half for the first year the asset is purchases and subsequently deployed.
4-In a year when your business does not make money, it will make sense not to amortize/depreciate your asset. Depreciation/amortization rights can be retained for years when there is net income. Likewise, if the net income for a given year is small, it is possible to use less than the maximum allowable CCA amount.
5-When your business has a fiscal year that is shorter than 365 days, you must pro-rate your CCA claim. Therefore, you must base your CCA claim on the number of days in your fiscal period compared to 365 days.
6-Because your corporate policy on depreciation/amortization may not reflect CCA – numbers from your accounting file will have to be modified to reflect Revenue Canada rules and be reconciled regularly. Corporate tax returns include a form which reconciles corporate depreciation/amortization rates to CCA.
Tax software issues:
Tax software will allow for the application of these rules. For simplicity, grouping assets in the same classes (except for the year of purchase when the ½ year rule applies) makes sense.
Tax software will generally accommodate these issues (specifically the last one), but it is important to ensure that your tax accountant understands your situation and/or to verify the results of your tax software to ensure that moving forward depreciation into a later year was “understood” by the software.
Beasley folders to create (if you have expenses related to asset purchases):
1-List of assets bought and sold, internal depreciation/amortization and their related CCA categories
2-Excel table (or similar software) tracking assets over time and their CCA deductions (expenses) for tax purposes
