An Annual Allowance is a tax deduction relevant to Canadian businesses that have purchased eligible capital property.
Eligible capital property is property that doesn't physically exist but gives you a lasting economic benefit, such as a license that runs for an indefinite period, a franchise, or goodwill.
The Canada Revenue Agency deems what you paid for such property to be an eligible capital expenditure, which means that in terms of income tax, it's a tax write off over time rather than a case where you can deduct the full amount of the business expense.
The Annual Allowance is the amount that you can actually deduct in any given year. Calculating the Annual Allowance works much like calculating the Capital Cost Allowance. Because you can only deduct a portion of the cost of your eligible capital expenditure each year, the eligible capital property you buy (and sell) is kept track of in a cumulative eligible capital (CEC) account and your Annual Allowance is based on the balance of this account.
Chapter Five of the Canada Revenue Agency’s T4002 Business and Professional Income Guide provides detailed information on eligible capital expenditures and includes a chart to help calculate the Annual Allowance.
