Capitalise or expense, and why your books and your tax return disagree

Buy a laptop and you have a decision. Is it a cost this month, or an asset you own that wears out over several years?

Get it wrong in one direction and this year's profit is understated. Get it wrong in the other and your balance sheet fills with assets that stopped existing years ago.

The capitalisation decision#

An item is capital if it will provide benefit beyond the current period. The test is genuinely about useful life, not about price — but almost every business applies a dollar threshold underneath it, because tracking a $200 chair across five years costs more than the accuracy is worth.

A threshold somewhere between $500 and $2,500 is typical. What matters is that it exists, is written down, and is applied consistently. Capitalising a $600 item one year and expensing an identical one the next makes the comparison between those years meaningless.

Repairs are expense; improvements are capital. Fixing a roof keeps the asset working; replacing it with a better one extends its life. The line is genuinely grey, and the practical test is whether the work restored the asset or upgraded it.

Book depreciation#

Once capitalised, the cost spreads across the periods that benefit. Straight-line — cost divided by useful life — is the usual method and the easiest to defend.

Account	Debit	Credit
7000 · Depreciation	250.00
1710 · Accumulated Depreciation		250.00
Total	250.00	250.00

The reason accumulated depreciation is its own account rather than a reduction of the asset is that both facts stay visible: what you paid, and how much has been consumed. Net book value is the difference, and it is derived rather than stored.

Book depreciation is your estimate. You choose the useful life and the method, and you are asserting something about how the asset actually wears out.

Capital cost allowance is not depreciation#

For Canadian tax, book depreciation is added back and a separate deduction — capital cost allowance — is taken instead. It is not a better estimate of wear; it is a statutory schedule that has nothing to do with your asset.

Assets go into classes, each with a prescribed rate, generally on a declining-balance basis. There are rules about when an asset becomes available for use, incentives that accelerate the first year, and ceilings on certain assets — a passenger vehicle is capped regardless of what you paid for it.

Two consequences follow, and both are normal:

• Your net book value and your undepreciated capital cost will differ, permanently, for the whole life of the asset.
• The difference is a timing difference, not an error. Over the asset's life both routes deduct the same total; they disagree about which years.

The register is the thing to actually maintain#

What makes this tractable is a fixed-asset register: one row per asset, with cost, acquisition date, the date it became available for use, class, method, useful life, and disposal details when it goes.

Without it, both calculations become archaeology, and disposals become guesses — you cannot compute a gain without knowing what the asset cost and what has already been claimed against it.

In Comma the register is a tax subledger: it never posts to the ledger, it drives the CCA schedule, and book depreciation stays where it belongs, in journal entries. Opening undepreciated capital cost is derived from cost history less what prior filed years actually claimed, rather than stored as a number someone typed — which means it cannot drift away from the filings it is supposed to follow.

If you are working out the ceiling on a vehicle, the automobile benefit tool carries the current capital cost, lease and interest limits alongside the taxable-benefit calculation.