Capital cost allowance
Learn what capital cost allowance (CCA) is and how to calculate and claim it on your Canadian business taxes.
Published Thursday 23 July 2026
Table of contents
Key takeaways
- Capital cost allowance lets you deduct a percentage of a business asset's cost each year as it loses value, rather than the full cost in year 1.
- The Canada Revenue Agency groups assets into classes, each with its own rate, and most small businesses use the declining balance method to claim CCA.
- You can claim any amount from zero up to the maximum each year, so you can save larger deductions for years with higher taxable income.
- When you sell an asset, recapture or a terminal loss can adjust your income, so track each asset by class and keep accurate records on Form T2125.
What is the capital cost allowance?
Capital cost allowance (CCA) is a tax deduction that lets Canadian businesses claim a percentage of a depreciable 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. A temporary immediate expensing incentive let some businesses claim the full cost of certain eligible assets, up to $1.5 million per year, but it applied only to property that became available for use before 2024 for Canadian-controlled private corporations, and before 2025 for most unincorporated businesses. 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 CCA rate. This works much like depreciation, spreading the cost of an asset across its useful life. 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 administers its own income tax, so its CCA rules can differ. Its additional capital cost allowance of 30% was abolished as of 1 January 2024, so check the current rules with Revenu Québec if you operate there.
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
For example, you might buy a $3,000 computer for your business. Instead of claiming the full cost in the first year, you claim a percentage 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. Treating these purchases as ongoing business expenses also helps you plan future spending with more confidence.
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'll use for tax purposes, and here's how it 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
Take equipment you buy for $10,000 in Class 8 (20% rate) as a worked example:
- Year 1: claim $2,000 (20% of $10,000)
- Year 2: claim $1,600 (20% of the remaining $8,000)
- Year 3: claim $1,280 (20% of the remaining $6,400)
The Canada Revenue Agency decides which method you use, so 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.
Class 1 (4% rate) covers 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) covers office equipment and tools, including:
- Furniture, photocopiers, and business appliances
- Tools costing $500 or more per tool
Class 10 (30% rate) covers motor vehicles only, including:
- Cars, trucks, and other passenger and motor vehicles
- Passenger vehicles that cost more than the limit, which fall into Class 10.1 with a capital cost limit of $38,000 (plus tax) for vehicles bought in 2025
Class 12 (100% rate) covers lower-cost items you can write off in full, such as:
- Tools and some software
- Items costing under $500
Class 50 (55% rate) covers computers and systems software, including:
- Computer hardware and systems software acquired after 18 March 2007
- Most general-purpose electronic data processing equipment
Class 43 (30% rate) covers manufacturing equipment used to make products for sale. Class 53 (50% rate) covers new manufacturing equipment bought between 2016 and 2025.
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%.
What happens when you sell an asset
Selling a depreciable asset can change your taxable income for the year. The Canada Revenue Agency uses 2 rules, recapture and terminal loss, to reconcile what you claimed against what the asset was actually worth.
Recapture happens when you sell an asset for more than its undepreciated capital cost (UCC). The Canada Revenue Agency adds the excess back to your income, because you claimed more CCA than the asset lost in value.
A terminal loss happens when you sell the last asset in a class for less than its UCC. You can deduct the remaining balance from your income, since the asset lost more value than you claimed. Understanding how these adjustments flow through your assets and liabilities helps you plan the timing of a sale.
How to calculate capital cost allowance
Calculating your CCA follows a simple three-step process. Work through each class in turn:
- Group assets by class. Add up all purchases in each CCA class for the tax year.
- Apply the rate. Multiply each class total by its CCA rate.
- Decide how much to claim. You can claim any amount from $0 up to the maximum calculated amount.
Here's how that looks across 2 classes:
- 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 small business tax more.
Include goods and services tax/harmonized sales tax (GST/HST) in your asset cost, using 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, by following these steps:
- Find the undepreciated capital cost (UCC) for each asset class from the previous year.
- Add the cost of any new assets you purchased during the year.
- Subtract the value of any assets you sold.
- Apply the half-year rule to new assets, which means you can only claim 50% of the CCA in the first year.
- Calculate the CCA deduction for each class by multiplying the adjusted UCC by the class rate.
- 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.
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.
Here's how it works in practice:
- Normal rate: a Class 10 motor vehicle uses a 30% CCA rate
- First year only: 30% ÷ 2 = 15% maximum CCA
- Following years: the full 30% rate applies to the remaining value
This rule prevents businesses from delaying purchases until the end of the year to claim a full year's depreciation. Take a $6,000 vehicle in Class 10 as an example:
- Year 1: maximum CCA = $6,000 × 15% = $900
- Year 2: maximum CCA = $5,100 × 30% = $1,530
This first-year limit applies across asset classes, not just to vehicles.
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. When you claim, you'll need to take a few things 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 also be able to claim for related costs, including:
- fees related to the purchase or construction, not the land, such as legal, accounting, and engineering fees
- improvements or renovations not already claimed
- any additional fees not already claimed, such as building interest, accounting fees, and legal fees
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 frequently asked questions about capital cost allowance to help you plan your claim.
What method of depreciation does CCA use?
CCA uses the declining balance method for most business assets, where you claim a set percentage of the asset's remaining value each year. The Canada Revenue Agency decides the method, so you cannot switch to another approach.
How does CCA affect my taxes?
CCA lowers your taxable income by letting you deduct part of an asset's cost each year, which reduces the tax you owe. Claiming less in a low-income year lets you save larger deductions for more profitable years.
Which class do computers fall into?
Computers and systems software usually fall into Class 50, which has a 55% rate. If you buy a $2,000 business computer, the half-year rule applies in year 1, so your claim of $550 is based on 55% of $1,000.
What happens when you sell an asset?
If you sell an asset for more than its undepreciated capital cost, the difference is recaptured and added back to your income. If you sell the last asset in a class for less than its UCC, you can claim a terminal loss.
Can you claim CCA on a vehicle?
Yes, motor vehicles usually fall into Class 10 with a 30% rate, while passenger vehicles above the limit fall into Class 10.1. For 2025, the Class 10.1 capital cost limit is $38,000 plus tax.
Related terms
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Disclaimer
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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