What is cca in finance?

Capital property eligible for CCA excludes:[1]

CCA is calculated on undepreciated capital cost ("UCC"), which is generally defined as:[2]

Where the UCC for a class is negative, a recapture of depreciation is deemed to take place, thus adding to taxable income and bringing the balance of UCC back to zero. Where UCC for a class is positive, but all assets with respect to that class have been disposed of, a terminal loss is deemed to take place, thus deducting from taxable income and bringing the balance of UCC back to zero.[3]

CCA itself is generally calculated using the following items:

For assets subject to the full-year rule:

C C A = t d U C C {\displaystyle CCA=tdUCC} [4]

For assets subject to the half-year rule:

C C A = t d U C C − 1 2 t d ( a − b − c ) {\displaystyle CCA=tdUCC-{\frac {1}{2}}td\left(a-b-c\right)} [5]

Under the Income Tax Act:[6]

Part XI of the Income Tax Regulations provides for the calculation rules for CCA,[8] and Schedule II outlines the various classes of capital property that are eligible for it.[9] Special rules are in place to deem certain assets to be in separate classes, thus not becoming part of the general pool for the class.[10] Certain elections are available to taxpayers to transfer or reclassify assets from one class to another.[11]

Additional allowances are prescribed with respect to specified circumstances.[12] Specialized calculations for certain classes are also outlined in:

Part XVII of the Income Tax Regulations provides for specialized calculation rules for CCA with respect to capital property acquired for use in earning income from farming and fishing.[21]

CCA is calculated under the half-year rule, except where otherwise specified, with respect to the following classes.

In contrast to the practice followed in the United States for depreciation there is no penalty for failing to claim Capital Cost Allowance. Where a taxpayer claims less than the amount of CCA to which he is entitled the pool remains intact, and available for claims in future years. Unclaimed amounts are not subject to recapture.

Because assets subject to CCA are generally pooled by class, and CCA is generally calculated on a declining-balance basis, specific techniques have been developed to determine the net present after-tax value of such capital investments. For standard scenarios under the full-year rule and half-year rule models, the following standard items are employed:[25]

More specialized analysis would need to be applied to:

Capital cost allowance will be calculated as follows:[26]

Therefore, the Tax shield in year n = I t d ( 1 − d ) n − 1 {\displaystyle Itd(1-d)^{n-1}} , and the present value of the taxation credits will be equal to I t d ∑ n = 1 ∞ ( 1 − d ) n − 1 ( 1 + i ) n {\displaystyle Itd\sum _{n=1}^{\infty }{\frac {(1-d)^{n-1}}{(1+i)^{n}}}}

As this is an example of a converging series for a geometric progression, this can be simplified further to become:

P V = I t d i + d {\displaystyle PV={\frac {Itd}{i+d}}}

The net present after-tax value of a capital investment then becomes:

I ( 1 − t d i + d ) {\displaystyle I\left(1-{\frac {td}{i+d}}\right)} [27]

For capital investments where CCA is calculated under the half-year rule, the CCA tax shield calculation is modified as follows:

P V = 1 2 ( I t d i + d ) + 1 2 ( I t d i + d ) ( 1 1 + i ) = I t d i + d [ 1 2 + 1 2 1 + i ] = I t d i + d [ 1 2 ( 1 + i ) + 1 2 1 + i ] = ( I t d i + d ) ( 1 + 1 2 i 1 + i ) {\displaystyle {\begin{aligned}PV&={\frac {1}{2}}\left({\frac {Itd}{i+d}}\right)+{\frac {1}{2}}\left({\frac {Itd}{i+d}}\right)\left({\frac {1}{1+i}}\right)\\&={\frac {Itd}{i+d}}\left[{\frac {1}{2}}+{\frac {\frac {1}{2}}{1+i}}\right]\\&={\frac {Itd}{i+d}}\left[{\frac {{\frac {1}{2}}\left(1+i\right)+{\frac {1}{2}}}{1+i}}\right]\\&=\left({\frac {Itd}{i+d}}\right)\left({\frac {1+{\frac {1}{2}}i}{1+i}}\right)\\\end{aligned}}}

Therefore, the net present after-tax value of a capital investment is determined to be:

I [ 1 − ( t d i + d ) ( 1 + 1 2 i 1 + i ) ] {\displaystyle I\left[1-\left({\frac {td}{i+d}}\right)\left({\frac {1+{\frac {1}{2}}i}{1+i}}\right)\right]}

In cases where claims have been contested or disallowed by the Canada Revenue Agency, the Supreme Court of Canada has interpreted the Capital Cost Allowance in a fairly broad manner, allowing deductions on property which was owned for a very brief period of time,[28] and property which is leased back to the vendor from which it originated.[29] These decisions demonstrate the flexibility of the Capital Cost Allowance as a legal tax reduction strategy.

Capital consumption allowance (CCA), sometimes referred to as depreciation, is the amount of money a country has to spend each year to maintain its present level of economic production.