The cost of capital expenditures is deducted over time with annual capital cost allowance (CCA) claims.
These deductions are intended to approximate the useful life of the asset. For most capital assets, CCA is calculated on a declining balance basis based on the prescribed rate for the class. However, the rules differ for leasehold interests capitalized to class 13.
Leasehold interests include improvements or alterations to a leased property such as a building or amounts paid to the owner of a leased property to extend or sublease the property. These assets cannot be separated from the property when the lease expires and therefore will not have any enduring benefit to the taxpayer when the lease is terminated. For example, a lessee might install walls or flooring in the building to make it more suitable for their business operations. Items that can be separated from the building, such as shelving, would be capitalized to a different class.
Certain other items are specifically excluded from the definition of leasehold interests. These include erecting a building or structure on leased land, making an addition to a leased building or structure, or making alterations to a building or leased structure that substantially change the nature of the property. These assets would be capitalized as buildings and subject to the CCA rules of the applicable building class.
Leasehold interests are deducted over the term of the lease plus the first renewal term. For example, if the lessee signs a five-year lease which can be extended for an additional five years, the leasehold interests capitalized to class 13 would be deducted over a period of ten years. The lease period is subject to a minimum of five years and a maximum of forty years for purposes of calculating the annual CCA claim. The remaining balance in the class can be expensed in full in the year the lease is terminated assuming no additional leasehold interests are purchased prior to the end of the tax year.
In the year that leasehold interests are initially purchased, the half-year rule generally applies which only allows 50% of the regular CCA claim. Currently, accelerated investment incentive property rules apply which allow for an increased deduction in the year of purchase for property that becomes available for use prior to 2028.
Capital expenditures are a necessary component of successfully growing a business. The initial cash outlay can be significant, so it is prudent to understand the tax implications of the purchase.
For more information, please contact firstname.lastname@example.org or 1 844-GYTD-CPA