What is capital cost allowance? Definition and FAQs

Published Thursday 18 September 2025

Table of contents

• What is the capital cost allowance?
• Benefits of capital cost allowance
• Which method of depreciation can you use to calculate CCA?
• CCA classes of depreciable property
• Calculating capital cost allowance
• How to claim capital cost allowance
• Capital cost and rental property
• CCA for the self-employed
• Frequently asked questions about capital cost allowance

Key takeaways

• Apply the declining balance method to calculate your CCA by claiming a percentage of the asset's remaining value each year, with most small businesses using rates like 20% for office equipment (Class 8) or 30% for computers and vehicles (Class 10).
• Utilize the half-year rule strategically by claiming only 50% of the normal CCA rate in the first year you purchase an asset, then apply the full rate to the remaining value in subsequent years.
• Optimize your tax planning by claiming any amount from zero up to the maximum allowable CCA each year, saving larger deductions for years when your business has higher taxable income.
• Track your assets by CCA class and maintain accurate records of purchases, sales, and depreciation to simplify the claiming process on Form T2125 during tax season.

What is the capital cost allowance?

Capital cost allowance (CCA) is a tax deduction that lets you claim a percentage of your business asset's cost each year as it loses value.

You usually cannot claim the full cost of an asset in the year you buy it. Some businesses can claim the full cost of certain assets up to $1.5 million per tax year, but most assets must be claimed over several years as they lose value.

The Canada Revenue Agency (CRA) groups assets into classes, each with its own capital cost allowance (CCA) rate. You can claim CCA on assets such as furniture, computers, buildings, software, and machinery and equipment, but not all business assets are eligible.

Most small businesses use the declining balance method to claim CCA, as required by the CRA. Some assets, such as certain intangible assets, may use straight-line depreciation.

Quebec has its own rules. Its accelerated investment incentive lets you claim an extra 30% CCA on eligible properties.

Benefits of capital cost allowance

CCA helps you manage your cash flow and reduce your taxes. Here are other benefits of capital cost allowance:

• Lower your tax bill by claiming asset depreciation each year
• Improve your cash flow by spreading tax benefits over several years
• Make equipment purchases more affordable with ongoing tax savings

Example: Buy a $3,000 computer for your business. Instead of claiming the full cost in the first year, you might claim $900 in the first year, then smaller amounts each year as the computer loses value.

This approach matches how assets actually work – they lose value gradually, not all at once.

Which method of depreciation can you use to calculate CCA?

CCA uses the declining balance method for most business assets. This is the method you will use for tax purposes.

How declining balance works

• Year 1: Claim a percentage of the asset's original cost
• Year 2 and beyond: Claim the same percentage of the remaining value
• The amount decreases each year as the asset's book value shrinks

Example: Buy equipment for $10,000 in Class 8 (20% rate):

• Year 1: Claim $2,000 (20% of $10,000)
• Year 2: Claim $1,600 (20% of remaining $8,000)
• Year 3: Claim $1,280 (20% of remaining $6,400)

The Canada Revenue Agency decides which method you use – you cannot choose between different depreciation methods for CCA.

CCA classes of depreciable property

CCA classes determine how much you can claim each year. The Canada Revenue Agency groups similar assets together, each with its own depreciation rate.

Most common classes for small businesses:

Class 1 (4% rate): Buildings and structures. While 4% is the base rate, certain non-residential buildings may qualify for an additional allowance, increasing the total rate to 6% or 10%.

Class 8 (20% rate): Office equipment and tools

• Furniture, photocopiers, business appliances
• Tools costing $500 or more per tool

Class 10 (30% rate): Vehicles and computers

• Cars, trucks, computer hardware and software
• Passenger vehicles have a capital cost limit of $37,000 (plus tax) for vehicles bought in 2024
• Most electronic equipment

Class 43 (30% rate): Manufacturing equipment

• Machinery used to make products for sale

Class 53 (50% rate): New manufacturing equipment

• Machinery bought between 2016-2025 for manufacturing

Higher rates mean bigger deductions. A class 53 asset lets you claim 50% in the first year, while a class 1 building only allows 4%.

How to calculate capital cost allowance

Calculating your CCA follows a simple three-step process:

1. Group assets by class. Add up all purchases in each CCA class for the tax year.
2. Apply the rate. Multiply each class total by its CCA rate.
3. Decide how much to claim. You can claim any amount from $0 up to the maximum calculated amount.

Example:

• Class 10 vehicles: $50,000 × 30% = $15,000 maximum CCA
• Class 8 tools: $2,000 × 20% = $400 maximum CCA
• Total available: $15,400 CCA

You can claim less than the maximum CCA. If your business has low income this year, you may want to save the CCA for a future year when it will reduce your tax more.

Include goods and services tax/harmonized sales tax (GST/HST) in your asset cost – use the total amount you actually paid.

How to claim capital cost allowance

Claiming your capital cost allowance is a key part of filing your business taxes. You'll do this on Form T2125, Statement of Business or Professional Activities.

Here's a simple breakdown of the steps to claim cost allowance:

1. Find the undepreciated capital cost (UCC) for each asset class from the previous year.
2. Add the cost of any new assets you purchased during the year.
3. Subtract the value of any assets you sol.
4. Apply the half-year rule to new assets, which means you can only claim 50% of the CCA in the first year.
5. Calculate the CCA deduction for each class by multiplying the adjusted UCC by the class rate.
6. Enter the total amount on your tax return to reduce your taxable income.

Keep accurate records of your purchases and sales to make this process easier. Ask your accountant if you are unsure about your claim.

Capital cost and rental property

You can claim CCA on rental properties for wear and tear, but land is not eligible because it does not lose value.

You'll need to take into account:

• the type of rental property
• the purchase price or capital cost of a property (not the cost of the land)
• the proceeds of disposition if you sell a property
• whether the rental is a primary residence or not

You may be able to claim for:

• fees related to the purchase or construction (not the land) such as legal, accounting, engineering
• improvements or renovations not already claimed
• any additional fees not already claimed, such as building interest, accounting fees, and legal fees

The half-year rule

The half-year rule limits your first-year CCA claim. According to the Canada Revenue Agency, you can usually only claim CCA on one-half of your net additions to a class in the year you buy the asset.

How it works:

• Normal rate: Class 10 computer equipment = 30% CCA
• First year only: 30% ÷ 2 = 15% maximum CCA
• Following years: Full 30% rate applies to remaining value

This rule prevents businesses from delaying purchases until the end of the year to claim a full year's depreciation.

Example: Buy a $6,000 computer in Class 10:

• Year 1: Maximum CCA = $6,000 × 15% = $900
• Year 2: Maximum CCA = $5,100 × 30% = $1,530

If you have questions about claiming CCA for rental properties, speak with a tax professional.

CCA for the self-employed

If you run a home business, you can claim capital cost allowance on assets you use for your business, such as computers, machinery, vehicles, and buildings.

Talk to your accountant to see if claiming CCA is right for you. If you claim CCA on part of your home, capital gain rules will apply if you sell your home.

You can also claim CCA on assets worth more than $500 that do not fit into a specific class, such as some tools.

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FAQs on capital cost allowance

Here are some common questions small business owners have about CCA.

What is an example of calculating capital cost allowance?

If you buy a new business computer for $2,000 (Class 10, 30% rate), you can claim CCA. In the first year, the half-year rule applies, so your claim is based on $1,000. Your CCA deduction would be $300 (30% of $1,000).

How much CCA should I claim each year?

You can claim any amount from zero up to the maximum allowed for the year. If your business has low income, you might choose to claim less CCA and save the deduction for a more profitable year.

Can I claim CCA if my business had no profit?

You can claim CCA, but it might not be the best strategy. Claiming CCA when you have no taxable income won't provide a tax benefit for that year. It will, however, reduce the asset’s value for future claims.

It’s often better to save the claim for a year when you have profits to offset.