Capital Cost Allowance (CCA)

Capital Cost Allowance (CCA) is Canada's tax depreciation system — the mechanism by which businesses deduct the cost of depreciable capital assets over time for income tax purposes. Rather than deducting the full cost of an asset in the year it is purchased, a business claims a percentage of the asset's undepreciated capital cost (UCC) each year, according to a rate assigned to the asset's CCA class under the Income Tax Act Regulations.

Every type of depreciable asset belongs to a specific CCA class, each with its own rate. Common examples include: Class 8 (20% declining balance) for most business equipment and furniture; Class 10 (30% declining balance) for most automotive vehicles; Class 14.1 (5% declining balance) for goodwill and other eligible capital property, including customer lists and non-competition agreements with value attributed to customer relationships. In the year an asset is acquired, the half-year rule typically limits the CCA claim to 50% of the normal first-year deduction, though the Accelerated Investment Incentive introduced in 2018 provides enhanced first-year deductions for eligible property acquired after November 20, 2018.

In a business sale context, CCA affects both valuation and deal structure. Accumulated CCA claims reduce a business's UCC, which means that when depreciable assets are sold, the difference between the proceeds and the remaining UCC is subject to recapture — treated as ordinary income, not capital gains. This is one reason asset sales can trigger a meaningfully higher tax bill than share sales for sellers who have claimed significant depreciation.

See also: Asset Sale, Share Sale, Goodwill, Adjusted Cost Base.