CAPITAL COST ALLOWANCE AND DEPRECIATION – THEIR IMPACT ON DETERMINING INCOME FOR SUPPORT
If you are a separated or divorcing spouse who happens to have a business to run, the task of untangling of your personal financial affairs may involve considerations related to your business dealings as well. In particular, this may relate to the amount of “income” that you are considered by the court to have, for the purposes of determining the child or spousal support you may owe.
Take the question of Capital Cost Allowance (CCA). Under s. 11 of Schedule III of the Federal Child Support Guidelines, when reporting your Total Income figure from your tax return, you must add back any amounts you have deducted for “an allowable capital cost allowance with respect to real property.” In other words, if you deduct CCA for real property for your income tax, it does not count for Child Support Guidelines purposes, and must be added back to your income for calculating support levels.
Typically, this kind of CCA deduction relates to amounts taken for depreciation on buildings, and would usually apply to a parent who receives rental income from commercial or residential property. The Guideline’s deliberate elimination of this deduction for calculating support reflects the fact that buildings usually do not decline in value over the years.
However, this Guidelines-imposed rule about adding back the CCA applies only to real property; it does not apply to the CCA deductions on personal property, business equipment, or rental assets. This is because – unlike real property – those kinds of assets do depreciate over time and must be replaced.
With that said, the rule is not always applied uniformly by courts. In some cases – usually involving farm machinery – courts have decided to add back even the equipment-related CCA deductions from income, after concluding that the CCA deductions are not reasonable under the circumstances when viewed from a child support perspective (And to do so, the court exercises its discretion under s. 19 of the Guidelines to add those amounts back where it sees fit).
One final point: Simply because an expense or deduction is allowed under the Income Tax Act does not mean that it will automatically be allowed for determining income under family law, for Guidelines calculations or otherwise.