If you need to buy a major capital asset like a building, machinery or equipment to use in your farming business, consider buying it before the end of your fiscal year to claim tax depreciation, or capital cost allowance (CCA), to reduce your income on your tax return.
What is capital cost allowance?
Farm owners and agricultural producers can deduct certain expenses incurred to earn income. This includes everything from feed to building repairs. Find out exactly what you can deduct on your tax return as a Canadian farmer.
But if you purchase a fixed asset with a long-lasting life in your business (like a tractor or silo), you can’t deduct the entire cost as an expense in one taxation year. Since fixed assets wear out over time, they are considered “capital” and you can deduct their cost over a period of several years using CCA.
The CCA is the portion of the asset the Canada Revenue Agency (CRA) will allow you to deduct as depreciation on your tax return each year.
CCA can only be deducted on assets available for use at the end of your fiscal year. If you purchased an asset but it isn’t available for use, you can’t claim CCA in that tax year.
For example: let’s say you buy a combine in the fall, but it hasn’t been manufactured yet. It wouldn’t be eligible for CCA since it’s not available for use yet.
You don’t have to use the purchase in the fiscal year you acquired it, but it must have been delivered or made available to you and capable of performing the function you bought it for.
Featured Resource: Tax Preparation Toolkit for Farmers and Agricultural Producers
How much CCA can I claim?
It depends on the type of property you own and when you acquired it.
The CRA groups fixed assets into different classes, and each class has its own depreciation rate. For example, silos are a Class 8, which means you can deduct up to 20% each year. Here’s a list from the CRA on the most common depreciable properties for business owners.
You don’t have to claim the maximum amount of CCA in any given year. You can claim the amount you’d like, from zero to the maximum allowed for the year. This is a good opportunity to take stock of your tax position and if it would benefit you to claim CCA.
If you don’t have to pay income tax for the year, you may not want to claim CCA since it reduces the balance of the class by the amount of CCA claimed. As a result, the amount of CCA available for you to claim in future years will be reduced. In this case, you could save the CCA for future years when your tax bill is higher.
If you’re hoping to bring down your income, and you purchased a fixed asset in the current fiscal year, you can take advantage of the Canadian government’s accelerated investment incentive.
What is the accelerated investment incentive?
If the property (qualified equipment or a vehicle) is purchased after November 21, 2018, and available for use before 2024, it’s eligible for a higher rate of CCA. You can claim 150% of the normal CCA rate in the year of purchase.
This program is in effect until December 31, 2023.
Here’s an example*. Let’s say Tom bought a $100,000 silo in 2019 to replace his previous silo and it’s been manufactured and is available for use.
He’s created an addition of $100,000 in eligible property in 2019. His undepreciated capital cost (UCC) in the 2019 tax year is $32,000, which is the balance of the silo left for further depreciation.
He disposed of the old silo. So with a proceed of $5,000 from the sale of the previous silo, and a purchase of $100,000 on his new silo, the net additions are $95,000.
Since equipment qualifies for the accelerated investment incentive, he takes advantage of the temporary accelerated CCA rate. The incentive suspends the half-year rule that eligible property is normally subject to and provides for an accelerated CCA rate of 150% in the first year the silo is acquired.
The UCC is adjusted with the CCA calculation giving Tom a base amount of $174,500 ($95,000 net additions + $47,500 [additional 50% of the net additions] + $32,000 UCC opening balance = 174,500).
The CCA rate for the silo is 20%. The 20% is applied to the adjusted UCC. (20% x $174,500= $34,900) So Tom subtracts the CCA number from the base amount, along with the accelerated CCA rate, giving him $92,100 available for depreciation in 2019.
*Note: this is a simplified example. Contact your tax professional to discuss how you can take advantage of the CCA for your farm business.
What if I want to sell my fixed assets?
If you have depreciable assets to sell, it may be better to wait until the new fiscal year. The delay lets you claim another year of capital cost allowance (CCA) in the current tax year.
However, any gains on the fixed asset will also be included in your income in the following year, and the CCA will be reduced by deducting the proceeds of sale. It’s best to speak to a tax professional to strategize on which option is right for you.
What if I need to repair my fixed assets?
The cost of a repair that gives a lasting benefit or advantage is a capital expense. For example, if you placed vinyl siding on the exterior walls of a wooden property, you are extending the useful life of your property. This will need to be included in your CCA for that fixed asset.
Free Guide: Tax Preparation Toolkit for Farmers and Agricultural Producers
We know you’re dreading it, but it’s got to be done – and with a little preparation, you can fulfill your tax obligations without any stress. Our simple, easy-to-understand toolkit will teach you how to get organized for tax season. Download your free tax preparation toolkit to learn what information and key documents you need to prepare so you’re ready for the tax filing deadline. There’s even a printable checklist that lists all the documents you’ll need as a farmer, and tax write offs you shouldn’t miss out on. Get the prep out of the way so you can get back to the field. Download your toolkit today.
If you’d like to learn more about how FBC can support your business, call us at 1-800-265-1002 or email [email protected] Unlimited consultation related to tax matters is a key benefit of FBC Membership. You can also book an appointment online.