As we’re coming up to the end of the year, it’s time to think about year-end. Even if you have a fiscal year-end other than December 31st, this is still something to think about. You’re probably looking at buying a new piece of equipment, or furniture, or such and wonder when I should buy such items. Now or at the beginning of the fiscal year?
I say buy assets when you actually need them, and just a bit before so you have them ready to go when production gets ramped up, they’re ready to go. You might need to add a new computer for new staff or just figure it is time to upgrade (I like to upgrade my laptop every 4 years). You should be proactive in your asset purchases so that you’re not running into a lag time as you don’t have the asset ready.
For tax purposes, it’s always better to buy them before the year-end and get them ready to function. Why? The half-year rule that Canada Revenue Agency (CRA) has in place for asset purchases. Let’s say your fiscal year-end is December 31st, and you need new computers. If you wait until January to buy them the half-year rule applies and for that whole year you only get to write off a percentage of ½ that asset. If you buy it in, say, November, the ½ year rule applies, but then you still get the capital cost allowance on ½ the amount then the next year on the full amount.
If you’ve just started your business this year, then the CCA is prorated based on when you started the business. For example, Jane starts a business on June 1st and her first fiscal period ends on December 31st. She calculates her CCA to be $3,500. Since Jane’s fiscal period is only 214 days, the amount of CCA she can claim is limited to $2,052 ($3,500 × 214/365).
As your business grows and you need equipment, etc. it’s always best to buy assets as you need them and not worry about depreciation expense. Not buying something could actually end up hurting your business as it could slow down production or your productivity.
Home-based Business? How to Make Your Home Client Friendly
Home-based Business? Some Ideas for Places to Meet Clients Outside Your Home
Should You Pay Yourself Salary or Dividends When You Incorporate Your Business?
Five Common Mistakes That Small Business Owners Should Avoid
Do You Know Why the CRA Uses a Profit Test for Business?
Self Employed? Do You Know What Your Tax Obligations Are?
Summers Coming! Self-employment Ideas you can do in the Sun
What is Income Splitting and How Can it Reduce Your Tax Bill?