So then, what is a capital expense?
First, it is any expense that is not part of your annual operating expenses.
All of your expenses will either be for immediate needs or long-term needs. For instance:
If you paid rent for December 2015, that is an operating expense because the rent expense is only useful for that month. Now that it's January, you don't get to use that purchase anymore.
However, If you bought a new iMac on Boxing Day in 2015 you'll note that it's just as useful this month as it was last. In fact, you might even get several years good use out of it.
Because you'll be using the iMac for years, it's value is more like cash in the bank or "capital" than like December rent. What you did on Boxing Day was essentially exchange cash for a cash-like thing called a computer. Not a bad exchange if you ask me!
But here's the catch. Because computers slowly lose their value, unlike money, you are allowed to associate an operating expense with it during its useful life. This loss of value is called depreciation, and the operating expense is called a Capital Cost Allowance.
What else do you need to know? Well, intuitively you know that not every capital item that you buy will depreciate at the same speed. A building will last A LOT longer than an iMac. And, it would feel weird if you were allowed to simply guess at how long each will survive. So, the tax man wrote them all down here.
What then of our iMac? The government says it's class 50, meaning that your Capital Cost Allowance is 55%. In other words, it's useful life is just shy of 2 years. So, instead of adding a $1,000 expense in 2015 for that computer, you instead do this:
Trade -1,000 cash from your assets for +1,000 computer to your assets
Operating Expenses of $275 in 2015, $398.75 in 2016 and $326.25 in 2017.
Note above that in 2015 you are allowed to deduct a half-year's worth of life. The Government basically doesn't care what day you purchased it, but says that we should all just treat it like every major expense was bought on July 1. Then 55% of the remaining value is expensed in 2016, while the rest is expensed in 2017.
That's basically it! Questions, complaints? Email me at email@example.com.