Depreciation vs CCA: two numbers, one asset.

If you've ever compared your financial statements to your corporate tax return and wondered why the equipment write-off doesn't match, you've met depreciation vs CCA. They both spread the cost of an asset over time. They just answer different questions, for different readers, with different rules.

This guide explains both, works through the same asset under each method, shows the journal entry and the tax adjustment, and covers how it looks in QuickBooks Online. If you haven't read our capital cost allowance explainer yet, it's a good companion.

1Two questions, two answers

Depreciation tries to reflect economic reality: a $30,000 piece of equipment that lasts five years costs you about $6,000 a year. CCA is a policy tool: CRA decides how fast you can deduct, sometimes faster than reality and sometimes slower.

2A worked example: the same $30,000 asset

Say your incorporated landscaping company in Edmonton buys a $30,000 piece of equipment (before GST, which you claim as an input tax credit). Your accountant estimates a five-year useful life with no salvage value. For tax, it's Class 8 at 20%.

Book depreciation: straight-line

$30,000 ÷ 5 years = $6,000 a year. The year-end journal entry is:

No cash moves. The expense lowers your profit, and accumulated depreciation, a contra-asset account, reduces the equipment's value on the balance sheet. Our guide to adjusting journal entries covers other year-end entries like this one.

Side by side for three years

The CCA column uses the standard half-year rule in year one ($30,000 × 50% × 20%). First-year incentives have changed this for many assets in recent years, so check the current CCA rules for your purchase date. The method is what matters here.

3How the two meet on a corporate tax return

A corporation's T2 starts from the net income on its financial statements, which already has depreciation deducted. Because depreciation isn't deductible for tax, it's added back on Schedule 1, and CCA (calculated on Schedule 8) is deducted instead.

Using year one, and assuming $80,000 of profit before depreciation:

Over the asset's full life, total depreciation and total CCA (plus any recapture or terminal loss when you sell) tend to come out to similar totals. It's the timing that differs.

And for sole proprietors

If you're self-employed and file a T2125, there's usually no separate set of financial statements to reconcile. You claim CCA directly in the capital cost allowance section of the form. Many sole proprietors never record book depreciation at all, and that's generally fine for a simple business.

4When you sell the asset

Here's where the two systems really part ways. Say that on the first day of year 4 you sell the equipment for $14,000 plus $700 GST. Its net book value is $12,000 ($30,000 cost minus $18,000 accumulated depreciation), so in your books there's a $2,000 gain.

For tax, the $14,000 comes off the Class 8 UCC of $17,280, leaving $3,280. If other Class 8 assets remain, that balance just keeps being claimed. If this was the last asset in the class, the $3,280 is generally a terminal loss you can deduct. Either way, the accounting gain is reversed out on the tax return, because CCA handles the disposal its own way. The GST you charge on the sale is collected for CRA like any other taxable sale.

5Can you just make depreciation equal CCA?

Plenty of small private companies do. Their accountant records depreciation at the CCA amount so there's nothing to reconcile. It's simple and, for many small businesses whose statements are mostly used for tax, perfectly acceptable.

The downside is accuracy. If CCA rules let you deduct an asset much faster than it really wears out, your balance sheet shows it worth less than it is, and your profit swings with your buying decisions. If you need statements for a bank loan, a buyer or investors, real depreciation tells a truer story. It's a judgment call for your accountant, based on who reads your statements.

6Depreciation in QuickBooks Online

• Set up the asset accounts. For each major asset group, use a fixed asset account for cost and a matching accumulated depreciation account. Many bookkeepers set them up as a parent account with two sub-accounts so net book value shows at a glance.
• Record purchases to the cost account, net of GST, never to an expense.
• Record depreciation by journal entry (+ New, then Journal entry): debit Depreciation expense, credit Accumulated depreciation. Many businesses do it once a year at year end; for monthly reporting, a recurring monthly entry of one-twelfth smooths the profit.
• Don't try to record CCA in QuickBooks. CCA lives on the tax return and in your accountant's working papers. Your books just need clean asset records to calculate it from.

7Common mistakes

1. Expecting the books to match the tax return

They're not supposed to, at least not for assets. A difference between depreciation and CCA isn't an error.

2. Booking depreciation as a credit to the asset account

Crediting the cost account directly loses the original cost from your books. Use a separate accumulated depreciation account so you always know both the cost and how much has been written off.

3. Depreciating land

Land doesn't wear out, so it isn't depreciated and isn't eligible for CCA. If you buy a building, the land portion has to be separated.

4. Forgetting disposals

When you sell or scrap an asset, remove both its cost and its accumulated depreciation, and record any gain or loss. Otherwise ghost assets sit on your balance sheet for years. Our year-end bookkeeping checklist includes a fixed asset review for this reason.

5. Starting depreciation at the wrong time

An asset is depreciated from when it's available for use, not when it was ordered or paid for. Equipment bought in December but not delivered until February shouldn't carry a full year of depreciation in December's year. CCA has its own "available for use" rules too, so record the in-service date on the invoice or in your asset list.

Plum keeps fixed asset records, depreciation entries and year-end packages ready for incorporated businesses in Edmonton, St. Albert, Sherwood Park and Spruce Grove, and works with a partner CPA on the T2. Book a call if you'd like your assets sorted before your next year end.

8Questions people ask

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This article is general information for Alberta businesses and isn't tax or legal advice. Rules and thresholds change, so confirm your situation with your accountant or CRA.