Any business can claim capital allowances relief against their tax bill. Capital allowances are basically tax benefits on necessary purchases to conducting your business; which include but are not limited to, capital expenditures, like an espresso machine.
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Capital purchases remain with your organization as assets until you use them or sell them. Capital purchases include equipment, materials and supplies like computers, office furniture, and the like.
If you can show that capital purchases, like the espresso machine example, are really necessary to conduct your company’s activities then you can claim capital allowances. This is why capital allowances consultants can be helpful. Capital allowances can be claimed by you, your spouse, your parents, your dependents, or your mortgage broker, who acts on behalf of the mortgage lender.
What Are Capital Allowances?
One area that often gets overlooked when it comes to claiming capital is the office fit out. If you have a small office and you want to get it ready for the job market or increase business, you may want to consider purchasing new office equipment, including an air conditioning unit. The cost of the equipment would be included in the gross receipts of your business and could be claimed as a business expense.
There are several ways that you can claim capital allowances in relation to the purchase of new office fit out equipment. You could first choose to depreciate the cost of the equipment, while simultaneously maintaining its fair market value. This method would require that you use current raw material costs in its entirety. Second, you could choose to depreciate only a portion of the cost of the new office fit out. Thirdly, you may decide to claim depreciation at the retail value of the product, rather than the fair market value.
To claim capital allowances on depreciated or updated capital assets, there are two steps you must take. First, you must determine the amount of capital relief you are entitled to claim and secondly, you must determine the amount of expected life (EEL) left on the asset. For most businesses, the amount of capital relief to claim is equal to the total amount of current and capital gains tax credits that you have applied to the asset over its estimated useful life. The capital and EEL relief, however, will vary based on your business’s individual circumstances.
One of the ways that you can claim capital allowances on depreciated assets is through the application of the accelerated depreciation rule. The rule allows you to depreciate an asset, over a period of one year, by the amount -usually minus 5% or less that you would deduct in the computing of your annual investment allowance. However, in order to apply the accelerated depreciation rule, you must reduce the total cost of the asset – including any leasehold improvements that you may have added during the year – by the amount of capital that you deducted in the previous year. Any expenses that you incurred in the year in connection with the improvement that reduced the capital, but did not reduce the capital immediately before the year end, are eligible for the credit.
Another way that you can claim capital allowances is through the allocation method. Under this method, you can allocate a percentage of capital expenditure incurred to be applied to each of the three categories of relief: the business asset, the non-business asset, and the non-operating assets. If the amount of capital allowances that you claim is higher than the maximum eligible amount for each category, then the excess amount will be applied to the business asset. Similarly, if the amount of capital allowances that you claim is lower than the maximum eligible amount for the non-business asset, then the excess amount will be applied to the non-operating asset.
You can claim capital allowances on depreciated commercial property in a number of ways. You may choose to claim depreciation based on the actual cost of the building or structure, including any improvements that have been made since the last year that the property was used for business, or based on a model time value. In either case, you must be able to demonstrate to the assessor that the amount of depreciation which would be recoverable under the guidelines of the Act would substantially offset the fair market value of the property at the date on which it would need to be paid or deducted.
Allowances cannot be claimed for expenses incurred in the year in which the loan or dividend is made or the taxable income earned in that year. However, you may claim capital allowances for expenses incurred in the preceding year if you met certain conditions. Examples of these conditions include: you were a resident of Canada for six consecutive months and you did not become bankrupt or ceased to be resident of Canada during the year; you were employed in an office or undertaking for a continuous period of one year; and you were not carrying on a trade (including rental interest or investment) during the year. If any of these conditions apply to you, then you may claim capital allowances on your tax return. However, if you meet any of the other conditions described in this article and your capital allowances are higher than the maximum amount that can be claimed, then you may be subject to a tax rebate claim for the excess amount.