Half-year rule

The half-year rule is the CRA convention that, in the year a capital asset is acquired, only half of its cost can be added to the class’s UCC for depreciation purposes that year. The other half is held back and gets added to the UCC pool at the end of the year (so it’s available for full-rate depreciation in the next year).

The rule exists to prevent a specific tax-gaming pattern: without it, a corporation could buy a big-ticket asset on December 31 and claim a full year’s CCA on it for the year just ending — even though the asset was effectively held for one day. Worse, the asset could then be sold on January 1 with nearly no tax consequence, allowing repeated cycles of “buy in December, claim full CCA, sell in January, repeat.” The half-year rule blunts this by averaging the depreciation across the acquisition year.

Mechanically (see also Undepreciated capital cost):

1. Reduced UCC (for CCA calculation purposes in year $n$):

$UC{C}_{\text{reduced}}(n)=UC{C}_{\text{end}}(n-1)+\frac{1}{2}\text{purchases}-\text{dispositions}.$

2. CCA claim for the year:

$CCA(n)=UC{C}_{\text{reduced}}(n)\cdot d.$

3. Closing UCC, with the deferred half added back:

$UC{C}_{\text{end}}(n)=UC{C}_{\text{reduced}}(n)-CCA(n)+\frac{1}{2}\text{purchases}.$

A worked example. Buy a $100,000 asset (Class 8, $d=20\%$) in year 1, no other transactions:

• UCC_{\text{reduced}}(1) = 0 + \tfrac{1}{2}(100{,}000) - 0 = \50{,}000$.
• CCA(1) = 50{,}000 \cdot 0.20 = \10{,}000. Only half of the "expected" \20,000.
• UCC_{\text{end}}(1) = 50{,}000 - 10{,}000 + 50{,}000 = \90{,}000$.

For year 2 (no transactions):

• UCC_{\text{reduced}}(2) = 90{,}000 + 0 - 0 = \90{,}000$.
• CCA(2) = 90{,}000 \cdot 0.20 = \18{,}000$.
• UCC_{\text{end}}(2) = 90{,}000 - 18{,}000 = \72{,}000$.

From year 2 onward, CCA proceeds at the full rate on the actual book value. Total CCA over the life of the asset is the same regardless of when you start; the half-year rule just delays it by ~half a year.

The half-year rule is baked into the standard derivation of the Capital tax factor (CTF), so when you use CTF in a PW analysis you’ve already accounted for it. (Note: some asset classes and the recent Accelerated Investment Incentive modify or suspend the half-year rule. For standard engineering-economics analysis the half-year rule applies unless the problem specifies otherwise.)

For the broader CCA framework see Capital cost allowance and Undepreciated capital cost. For PW factors that incorporate the rule see Capital tax factor and Capital salvage factor.