A capital asset is an asset that has a useful life longer than one year and is purchased by the corporation in order to generate profits. Capital assets include buildings, furniture, vehicles and equipment and they are depreciated over their useful lives. For tax purposes in Canada, corporations receive a deduction for CCA based on the type of asset which is separated into different classes. Similar assets are pooled together in the same class. For example, Class 1 is for buildings and it has a CCA rate of 4% using the declining balance method. The declining balance method applies a fixed percentage to the remaining book value each year.

For tax purposes, the remaining book value is called the undepreciated capital cost (UCC). When you acquire an asset, you only claim CCA on one-half of your net additions in a particular class (known as the half-year rule). When you dispose of an asset during the year, the proceeds of disposition are entered on schedule 8 and this can create a recapture of CCA or a terminal loss. A recapture of CCA is created when the proceeds of disposal are greater than the UCC balance. This can create a negative UCC balance and this amount is added to the net income for tax purposes. In contrast, a terminal loss occurs whenever disposal of an asset causes a positive UCC balance and there are no other assets remaining in the class.

A corporation can choose to deduct between $0 to the maximum CCA for any class as it is a discretionary expense. If a corporation has generated significant losses during a year, they may choose to not deduct any CCA as they can defer this expense to be used in future years.