What is CCA recapture and why does it matter when I sell a rental property?
Capital cost allowance (CCA) is the tax depreciation deduction available on depreciable property — including buildings used to earn rental income. Each year you claim CCA, you reduce the "undepreciated capital cost" (UCC) of the building, which in turn reduces your rental income for tax purposes.
When you sell the property, if your proceeds allocated to the building exceed the remaining UCC, the difference is "recaptured CCA." Recapture is fully taxable as ordinary income in the year of sale — it is not treated as a capital gain and does not benefit from the capital gains inclusion rate reduction. This means every dollar of previously claimed CCA can come back as fully taxable ordinary income on sale.
If the proceeds allocated to the building exceed its original capital cost, the excess is a capital gain, and the taxable inclusion rate applies to that gain. So a sale can produce both recapture (taxed fully) and a capital gain (taxed at the inclusion rate) — these are separate calculations.
Many rental property owners are surprised by the tax impact of recapture on sale. Understanding the magnitude of your UCC pool relative to your expected sale price is important when modeling after-tax proceeds.
Key takeaways
- CCA recapture occurs when sale proceeds exceed the undepreciated capital cost of a building.
- Recapture is fully taxable as ordinary income — it is not a capital gain.
- Gains above the original capital cost of the building are capital gains taxed at the inclusion rate.
- A sale can produce both recapture income and a capital gain — they are calculated separately.