What happens to undepreciated capital cost if my rental property is destroyed by fire?

When a rental property is destroyed by fire, the insurance proceeds you receive are treated as the proceeds of disposition for CCA purposes, essentially standing in for a sale price. What happens next depends on how those proceeds compare to the property's remaining undepreciated capital cost, or UCC.

If the insurance proceeds are less than the UCC and it's the last property in its CCA class, the shortfall can produce a terminal loss, fully deductible against any income that year, the same as if you'd sold the property for less than its tax value. If the proceeds instead exceed the UCC, the opposite can happen: recapture, meaning some of the CCA you previously claimed gets added back into your income as taxable, because the payout showed the property held more value than your tax records reflected. Either outcome depends heavily on the actual UCC balance at the time of the fire and exactly what the insurance settlement covered, so getting a clear breakdown of the insurance payout and comparing it carefully against your CCA records is an important step before assuming either a loss or a recapture applies to your situation.