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A deferred tax liability is tax you’ll owe later on income your books already show today. It appears when the accounting rule and the tax rule spread the same cost over different years. The classic case is equipment: the CRA lets you deduct capital cost allowance (CCA) faster than a company usually writes the asset off in its financial statements, so tax gets paid later than the expense suggests.
Where does a deferred tax liability come from?
Your accounts say a $10,000 machine wears out over ten years, so they charge $1,000 a year. The tax return can’t use that number. The CRA says you can’t deduct the full cost of depreciable property in the year you buy it, and instead you claim CCA, a yearly deduction set by the asset’s class.
Class 8, the catch-all for business property that isn’t in another class, carries a 20% rate on the CRA’s classes page. Class 10, which covers motor vehicles and some computer equipment, carries 30%. Buildings bought after 1987 mostly sit in class 1 at 4%.
The two schedules disagree in the early years, then meet up. That gap, multiplied by a tax rate, is the number an accountant records as the liability.
What does a deferred tax liability look like in numbers?
Here’s an example we worked by hand from the declining balance method. It’s a $10,000 class 8 asset at 20%, against straight line book depreciation of $1,000 a year. We used a flat 12% tax rate because it makes the arithmetic clear, and it isn’t a real combined rate for any province. We also applied the full rate in year one. The CRA pages we read didn’t cover first-year limits, so a real return may claim less in year one.
| Year | CCA on the return | Book depreciation | Cumulative gap | Liability at 12% |
|---|---|---|---|---|
| 1 | $2,000 | $1,000 | $1,000 | $120 |
| 2 | $1,600 | $1,000 | $1,600 | $192 |
| 3 | $1,280 | $1,000 | $1,880 | $226 |
| 4 | $1,024 | $1,000 | $1,904 | $229 |
| 5 | $819 | $1,000 | $1,723 | $207 |
| 6 | $655 | $1,000 | $1,379 | $165 |
See the turn? The liability peaks in year four, when book depreciation finally overtakes CCA, and then it shrinks. After that it keeps shrinking as book depreciation runs ahead of the falling CCA claims. The total deducted eventually evens out. Only the timing moves.
Does the liability change what you pay the CRA?
No. It’s a bookkeeping entry, not a bill. The tax you pay each year is the tax on the return, worked out with CCA. The deferred tax figure sits on the balance sheet to show that a slice of today’s profit has tax attached that hasn’t been paid.
You’ll only see a payment effect when the timing gap reverses. In the years when book depreciation exceeds CCA, taxable income runs higher than book income, and the liability winds down.
Whether a company records one is set by the accounting standard its statements follow, and we didn’t check those standards on an official page. If your statements are prepared by an accountant, ask which method they use and why.
What mistakes and limits should you know about?
People often treat the liability as a debt owed to the CRA. It isn’t. Others assume the tax year and the calendar year are the same. The CRA says to base the CCA claim on the fiscal period that ends in the tax year, so a company with a March year end has to be careful.
Selling the asset early breaks the schedule above, so redo the numbers if that’s your plan.
The same timing idea shows up outside companies. Capital gains and RRSPs push tax to a later year too, though nobody records a liability for them on a personal return. Try the capital gains tax calculator for a sale, and the corporate tax calculator if you want to see the rate a corporation might pay. Then the percentage calculator works out the liability for any gap and rate you choose.
Where the numbers come from
CCA class rates and the rule against deducting full cost come from the Canada Revenue Agency’s pages on capital cost allowance and CCA classes. The example is our own arithmetic. The 12% rate is an assumption for illustration. We aren’t connected to the CRA or any government, and we haven’t reviewed the accounting standards behind deferred tax.
Frequently asked questions
What is a deferred tax liability in plain terms?
It's tax attached to profit your books show now but your tax return will only pay later, because deductions are timed differently.
Do I owe this amount to the CRA?
Not as a bill. It's an accounting entry that shows future tax. What you pay each year is set by the return.
What creates one most often?
Claiming CCA faster than the asset is depreciated in the financial statements.
Does it ever go away?
Yes. When book depreciation catches up with CCA, the gap closes and the liability reverses.
Which year's figures does CCA use?
The CRA says to base the claim on your fiscal period ending in the tax year, not the calendar year.
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Information only. This page is general information, not tax, legal or accounting advice. Tax-Services.ca is an independent publisher: we don't prepare or file tax returns or offer tax services, and we have no connection with the CRA, Revenu Québec, any government or any company named on this page. Check the figures that matter with an official source or a qualified professional.