Canuckbusiness

Start a business, Do your taxes, Save money

Expense or Capital Asset: Magic Rule #1

Remember that $2500 computer you bought last post? Well, I figure now is as good a time as any to talk about the difference between an expense and a capital asset.

Don’t panic. People always make this way harder than it needs to be.

A “capital” asset is just like a “capital” letter. In other words, it’s BIG.  Bigger than your average, normal, everyday asset.  And how do we define  big?  Why by $$$ value of course. This is business we’re talking about.

Let’s say I spend $50 on some ink for my printer. It may not be some big capital asset, but it is an asset nonetheless. It’s a little asset. How about a $0.50 pen? That’s a little asset as well. The Canada Revenue Agency recognizes that “little” assets like these are probably not going to last more than a year of normal use. And if they do, well CRA doesn’t care. Chances are, you’ll probably have to throw them away and buy another one before twelve months pass. Maybe several depending on what it is. And so, CRA allows us to “expense” these tiny assets completely on our tax return. This means we are allowed to decrease our income by the full amount we paid for these disposable assets in the same year we bought them.

But the CRA does care about those BIG assets (those Capital Assets). They know that if you spend a lot of money on something, you’re probably going to use it for more than one year. So they don’t allow you to deduct the full amount of the asset (“expense it”) in the year that you bought it. They will instead, only allow you to deduct a percentage of it, and this percentage varies depending on the asset.

For example, you can only deduct 30% of the value of a car, 4% of the value of a building, 20% of a fax machine, but at this point in time, 100% of a computer.

Holy cow! I thought this was going to be easy!

The truth is these percentages and categories change all the time, so let’s not waste any more time worrying about them. We’ll let our tax software at year-end tell us what we need to know. And if that doesn’t work, we might have to pay an accountant for the first year-end to figure out what category to put a certain asset in.  But once we have that sorted out, we’ll be able to let the tax software calculate the percentage for all the following years.

I’m going to give you a magic rule for determining if something is an expense (a little asset) or a capital asset.  But first, go back to your shoebox full of envelopes. Find a new envelope and write on it “Capital Assets”.

Magic Rule #1:

If it cost less than $400, call it an expense and put it in one of those envelopes you made after last post.

If it cost more than $400 put it in the “Capital Assets” envelope, if and ONLY if, you will still be able to use it next year.

In other words, if you spent $500 on pamphlets and you handed them all out, they would qualify as “Advertising Expenses” because you used them all up in the year. Even though you paid $500 for them, you would still put them in the “Advertising Expense” envelope.

So, the $2500 computer receipt would find a home in the “Capital Assets” envelope.

Stay tuned for more magic rules.

June 21, 2011 - Posted by | Running Your Business, Starting Your Business | , , ,

4 Comments »

  1. […] Updates/maintenance I’m going to summon up my Magic Rule #1 to help me here. If you kick out less than $400 to have someone work on your site during the year, […]

    Pingback by Is my website an asset or expense? « Canuckbusiness | October 20, 2011 | Reply

  2. Does CRA use this $400 threshold also? Or is this just your best judgement? I’d love to rely on this and know I wasn’t going to get any blowback…

    Comment by Hugh | May 28, 2013 | Reply

    • Hi Hugh,

      This is just what me and every other tax professional I know generally uses. There are always exceptions and if you are in doubt go ahead and capitalize everything.

      Comment by jkswift | May 29, 2013 | Reply

  3. Thank-you, thank-you, thank-you!

    Comment by Esther | March 18, 2014 | Reply


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s