CAPITAL COST ALLOWANCE

A sole proprietor cannot deduct the full cost of a computer, vehicle, furniture or other property that lasts longer than a year. Instead, the cost is added to a capital cost allowance (CCA) class and written off over several years at the rate prescribed for that class. CCA is claimed in Area A of Form T2125, and the class schedules in Areas B to F track additions and disposals. This page sets out how the class system works, the classes a sole proprietor most often uses, the first-year rules, and what happens when property is sold. Figures are for 2026.

HOW THE CLASS SYSTEM WORKS

• Undepreciated capital cost (UCC): each class is a pool. Its balance starts at zero, rises with each purchase, falls with each CCA claim and with the proceeds of each sale, and carries forward from year to year.

• Declining balance: most classes apply their rate to the UCC remaining at year end, so the deduction is largest in the early years and never fully reaches zero while the class has property in it.

• Discretionary claim: any amount from zero to the maximum may be claimed. Unclaimed CCA is not lost; it stays in the UCC and can be claimed in later years.

• Short fiscal year: in the first year of a business, or any fiscal period shorter than 12 months, the maximum CCA is prorated by the number of days in the period over 365.

• Available for use: CCA cannot be claimed until the property is available for use in the business, even if it was paid for earlier.

CLASSES COMMONLY USED BY A SOLE PROPRIETOR

• Class 1 (4%): most buildings acquired after 1987. Land is never depreciable and must be separated from the building cost.

• Class 8 (20%): furniture, fixtures, office equipment, appliances and most tools costing $500 or more.

• Class 10 (30%): motor vehicles, vans and trucks used to earn income, and passenger vehicles costing $39,000 or less before tax.

• Class 10.1 (30%): each passenger vehicle costing more than $39,000 before tax (acquired in 2026), placed in its own class with capital cost capped at $39,000 plus the related GST/HST and provincial sales tax.

• Class 12 (100%): small tools, kitchen utensils, medical or dental instruments costing less than $500, and application software that is not systems software. Most Class 12 property is subject to the half-year rule.

• Class 13 (straight-line): leasehold improvements to rented premises, written off evenly over the remaining lease term plus the first renewal period, with a minimum of five years.

• Class 14.1 (5%): goodwill, customer lists and other intangible property with no fixed life, such as the goodwill paid when buying an existing business.

• Class 50 (55%): computers, tablets and related data-processing equipment, along with their systems software.

• Class 54 (30%): zero-emission passenger vehicles, with capital cost capped at $61,000 plus taxes. A vehicle may instead be elected into Class 10 or 10.1 in the year of purchase.

FIRST-YEAR RULES

• Half-year rule: in the year property is acquired, CCA is generally limited to half the normal amount, on the assumption that the asset was bought mid-year.

• Accelerated investment incentive (AII): property acquired after November 20, 2018 and available for use before 2028 qualifies for an enhanced first-year claim. For property that becomes available for use from 2024 to 2027, the half-year rule is suspended, so the full normal rate applies in year one.

• Proposed extension: the federal government has proposed restoring the larger AII for property available for use after 2026 and before 2034. Check the CRA's current guidance before relying on it, as proposals can change before they become law.

• Immediate expensing: the temporary rule allowing individuals to deduct up to $1.5 million of eligible property in one year applied only to property acquired before 2024 and available for use before 2025, and is no longer available to sole proprietors.

WORKED EXAMPLE

A sole proprietor buys a $3,000 laptop (Class 50, 55%) in 2026 and uses it only for business.

• With the AII (available for use in 2026): first-year CCA is $3,000 × 55% = $1,650, leaving UCC of $1,350. Year two CCA is $1,350 × 55% = $742.50.

• Without the AII (half-year rule): first-year CCA would be $3,000 × 55% × 50% = $825, leaving UCC of $2,175.

PERSONAL USE OF PROPERTY

• Business-use proportion: where property is also used personally, only the business percentage of CCA is deductible. The full cost still goes into the class; the proportion is applied to the claim.

• Change of use: converting personal property to business use is treated as an acquisition at fair market value at that time (with special rules where value has risen). Converting business property to personal use is treated as a disposal at fair market value.

• Home: CCA can be claimed on the business part of a home, but doing so can make that part ineligible for the principal residence exemption on sale. Most proprietors therefore do not claim CCA on their home.

DISPOSING OF PROPERTY

• Deduction from the class: on a sale, the lower of the proceeds and the original cost is subtracted from the UCC of the class.

• Recapture: if the UCC becomes negative at year end, the negative amount is added to business income as recaptured CCA.

• Terminal loss: if no property is left in a class but a positive UCC remains, the balance is deductible as a terminal loss.

• Capital gain: proceeds above the original cost are a capital gain, reported on Schedule 3 rather than through the class.

• Class 10.1 exception: there is no recapture or terminal loss on a Class 10.1 vehicle. Instead, half the normal CCA may be claimed in the year of sale if the vehicle was owned at the start of that year.

WHEN TO CLAIM LESS THAN THE MAXIMUM

• Low-income years: if income is already covered by the basic personal amount and other credits, CCA saves little tax. Leaving it in the UCC preserves the deduction for a higher-income year.

• Home office expenses: business-use-of-home expenses can be deducted only up to the business income left after all other expenses, including CCA. Claiming less CCA can leave room to deduct home expenses now, while the unclaimed CCA stays in the class for a later year.

• CPP effect: CCA reduces net self-employment earnings and therefore CPP contributions as well as income tax.

KEY POINTS

• Pool, not asset: CCA is calculated on classes, not on individual items, except for Class 10.1 vehicles.

• Optional: claim anything from zero to the maximum; unused amounts carry forward.

• 2026 vehicle limits: $39,000 for Class 10.1 and $61,000 for Class 54, both before tax.

• Sales matter: selling property can trigger recapture, a terminal loss or a capital gain.

SOURCES

• Canada Revenue Agency: Guide T4002, Chapter 4, Capital Cost Allowance.

• Canada Revenue Agency: Classes of depreciable property.

• Department of Finance Canada: 2026 automobile deduction limits and expense benefit rates.