How is the company's tax bill affected by capital cost allowance (CCA) and how does this affect project value?

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How is the company's tax bill affected by capital cost allowance (CCA) and how does this affect project value?



Answer: CCA is not a cash flow. However, because CCA reduces taxable income, it reduces taxes. This tax reduction is called the CCA TAX SHIELD. For computing tax depreciation in Canada, assets are assigned into different ASSET CLASSES, which have specified CCA rates. Most asset classes follow a declining balance system for computing CCA, and, therefore, most assets continue to generate CCA tax shields over an infinite tie frame. Because of this, we find the present value of operating cash flows separately from the present value of the CCA tax shields to determine the net present value of a project.

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