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Can You Claim Your Computer On Your Income Tax Return?

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Canadians have fallen in love with their computers be they Macs, PCs or mainframes. This article will examine how these not so inexpensive toys may be treated for income tax purposes.

As a general rule, any and all deductible expenditures for income tax purposes must satisfy three criteria. These are:

  1. the expenditure was incurred in order to earn income from business, rental or investment income,
  2. the item in question is not “personal” by nature, and
  3. the total amount spent on the item was reasonable in the circumstances.
Once you have purchased your computer and it is up and running, you must look at your individual situation and determine how you are using it. If you bought it with the primary objective of “surfing the Internet” so that you can impress your friends and keep up with your children, the computer was probably purchased as a personal item with little or no intention of being used to earn income. The computer hardware and its related software cannot be used for income tax purposes.

On the other hand, if you use the machine in the conduct of a business or to keep track of an extensive portfolio of investments for example, its acquisition and associated costs can be used for income tax purposes. The remainder of this article will focus on these kinds of cases and how they are treated for income tax purposes.

The Income Tax Act recognizes two distinct types of expenditures. The first is termed a “capital expenditure” and covers the purchase of items that are expected to be productive over a period of greater than one year. In this context, such expenditures include most computer hardware.

Because these items are expected to last over several periods, the Act requires these costs be apportioned in a pre-determined manner called “capital cost allowance” and expense for income tax purposes over the lifetime of the item. Some items qualify to be written off at a faster rate than others, but generally, the rate that can be applied will be thirty per cent on a declining balance basis with only one half of the rate utilized in the year that the item was purchased.

The second type of expenditure is “current”. These items are “consumed” within one year and include such items as floppy disks, ribbons, toner and computer repairs. For income tax purposes, they are fully deductible within the year of purchase.

Computer software can be either current or long-term. Some system software is considered to be a capital expenditure while software upgrades and programs that require annual replacement are clearly current expenditures.

Note: The provided articles highlight tax, accounting and other financial matters in general terms. Nevcon recommends that no action be taken based solely on the basis of information contained in these articles. Specific professional advice should be obtained as individual circumstances must always be taken into account.

Article ©1998 The Quarterly Dividend
Reprinted with permission

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