Chapter 5-Capital Cost Allowance
Capital Cost Allowance:
1) Section 18(1) of the Income Tax Act lays down general limitations as
regards the deductibility of the expenditure for computing the business
income. This also includes limitation on deduction of the capital cost.
2) Section 20(1) lays down that no part of the capital cost is deductible
except the CCA as laid down in the regulation. Part XI of ITR along with
the schedules II through VI lays down how to compute CCA.
3) Tax and Accounting terms compared
Tax Terminology Accounting Terminology
Capital Cost Allowance (CCA) Depreciation
Capital Cost Acquisition Cost
Undepreciated Capital Cost (UCC) Net Book Value
4) There are difference between the Accounting and the Tax treatment
with respect to the Acquisitions, Dispositions and Amortization.
Accounting-In Accounting GAAP’s are followed with respect to the
booking of the acquisition cost which includes the cost originally paid for
bringing the asset to its present condition or location.
Tax-More or less the same principle is followed except for the fact that
the assets are grouped as a class, e.g. Class 8 for furniture. The
exception that can be mentioned is of interest on the borrowing used for
the purpose of acquisition of the asset which can be capitalised or
deducted as an expense
Accounting-The gain or loss with respect to each individual asset is
separately worked out.
1 Tax-There are tax implications on the disposal asset. It can give rise to
Capital gain or recapture of the CCA or Terminal loss. It can never give
rise to Capital Loss.
Amortization is done based on the GAAPs, which are consistently applied
from year to year.
Providing of CCA is based upon the block rates and the method could be
Straight line or Written Down Value.
Taxpayer has the complete flexibility with regards to the amount of the
claim of CCA.
For accounting purposes straight-line method is popular for providing
amortizations where as Written Down Value method is prescribed for the
most of the assets in taxation.
As a result of the above, Net Book Value and Undepreciated Capital Cost
can significantly differ.
Additions to the Capital Cost:
In order to claim the CCA the asset must be:
1) Owned by the taxpayer as on the last day of the year and
2) Used for the purpose of producing the income from business or
Before an asset is classified as a Capital Asset, regards must be to
to the nature of the business and the use of the asset.
3) For Providing CCA there is a half-year rule.
4) In case of the business year being shorter/longer than a 12 month
period, CCA must be prorated.
5) The taxpayer can capitalize the interest paid/payable on the money
borrowed to acquire the property and add the amount as a part of the
cost provided an election is made to that effect. Alternatively the tax
payers can deduct the interest cost totally and could result into a loss
subject to the set off and carry over rules.
2 6) Grants/subsidies/loans etc. from the government is to be excluded
from the capital cost of the asset, which is consistent with the
accounting treatment. ITA Section 13(7.1)
7) When any amount of GST/PST is paid with respect to the acquisition
of any asset, normally, GST is not included as a part of the cost since
GST is recovered through the Input Tax Credit System. However, if the
GST is not recovered the same is added as a part of the Capital Cost.
PST paid for acquiring the asset is treated the same way.
Available for Use Rule:
CCA is claimed when the asset is available for use. In case if the
taxpayer owns the asset and the asset is not available for use then the
right of claiming of CCA gets deferred till t