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Capital investments are money put into the business with the aim of expanding or growing the business.
Capital investments are any amount invested to enable long-term business growth. These investments will include money used for purchasing capital assets such as land, factory, buildings, patents, automobiles, etc. For example, a new plant can increase production capacity, thereby leading to higher revenues. These investments are for the long term and are different from business operating expenses. These costs are not fixed assets always; they can also include other investments such as term deposits, bonds, stocks, etc.
Capital investments, per se, do not have any impact on the taxation. However, any income arising out of these investments, any expenses incurred on these investments or capital cost allowance (CCA) can affect your tax. Also, there are tax implications on disposal or settlement of capital investments.
Let's say you invested some amount in term deposits. You cannot deduct this amount from your income. However, any interest received on such investments needs to be added to your income. This income will be taxed at regular rates. For example, your business income is $40,000, and you received interest of $2,000. You need to add this $2000 to your income, which will make your taxable income as $42,000.
Suppose you incur any repair or maintenance expenses on new machinery. You can reduce these expenses from your taxable income.
For fixed assets, you can claim tax benefit in the form of Capital Cost Allowance or CCA. For example, you purchased a new building for $500,000 in 2014. CRA doesn't allow you to expense the entire amount in one year, or in other words get tax benefits for the full $500,000 in a single year. You will be able to deduct only a portion of this amount every year from your income. In Canada, this amount is known as the CCA. The CRA has set out these percentages in detail for different asset classes. In this case, the CCA can be anywhere between 4-10%, which is the deduction rate set by CRA for buildings. Assuming a rate of 10%, you will be able to deduct only 50,000 (10% of $500,000) from your income. In the subsequent year, this CCA of 10% will be charged on the remainder amount, i.e. $450,000.
Capital investments can be disposed of either at a gain or loss. Capital gains are taxed at only 50% of the gain. Suppose, you make a profit of $100,000 by selling a capital investment, you need to add only $50,000 to the income for taxation purposes. Capital losses are also taxed at 50% of the total loss. However, a key difference is that the capital loss amount can be used only to offset capital gains and not regular income. So, for example, your income is $50,000, and you make a capital loss of $25,000 in a year without any capital gains. In this case, you cannot deduct $12,500 (50% of $25,000) from your income. However, suppose in the same year, in addition to the other two items, you make a capital gain of $25,000. In such a case, you can offset the capital loss amount of $25,000 against the capital gain of $25,000 which is eligible for tax. And, you won't have to pay any tax on the capital gain.
There is no impact of capital investments on taxation. However, other components such as income from investments or CCA as well as gains or losses made on the disposal of capital investments can have implications on tax.