Capital Cost Allowance on a Rental Property in Ontario

Capital cost allowance, or CCA, is the tax system's way of letting you deduct part of the cost of a rental building over time. It can lower your taxable rental income each year, but it comes with a cost later, when you sell.

This article explains how CCA generally works, why many landlords hesitate to claim it, and how it connects to recapture and the principal residence exemption. The decision depends on your finances and plans, so it is worth discussing with an accountant or lawyer.

How CCA works on a rental building

CCA on a rental property can generally be claimed only once the property has become available for use. It is calculated on the declining-balance method, and you do not have to claim the maximum in any year.

Land is not depreciable property, so CCA is claimed only on the building. A rental building may fall in Class 1, 3, 6, 31 or 32, depending on what it is made of. Class 1 generally includes most buildings acquired after 1987, and the CRA guide describes it as a 4% rate. Confirm the class for your specific building.

In the year you acquire the property, you can usually claim CCA on only one-half of net additions to a class, which is the half-year rule. The guide says the rule does not apply to accelerated investment incentive property.

The limit: CCA cannot create a loss

CCA cannot be used to create or increase a rental loss. Net rental income is calculated across all your rental properties before CCA is claimed. If your property barely breaks even after expenses, CCA may give you little or no benefit in that year.

Because the claim is optional, you can claim less than the maximum or skip a year. Many landlords weigh a smaller tax bill now against a larger one on sale.

Recapture and terminal loss on sale

Under subsection 13(1) of the Income Tax Act, if the class's undepreciated capital cost is negative at year-end, the excess is included in your income for the year. This is recapture, and it is taxed as ordinary income rather than as a capital gain.

On the CRA's schedule for a disposition, a negative column 7 means a recapture of CCA, which is added to income. If no property remains in the class, there may be a terminal loss. Usually 100% of a terminal loss is deductible, but only 50% of a capital loss.

The capital gain itself is proceeds of disposition minus the adjusted cost base and the outlays and expenses of the sale. Recapture is a separate item that is taxed on top.

CCA and the principal residence

Every change in use of a property is treated as a sale at fair market value. Converting a principal residence to a rental therefore triggers a deemed disposition and reacquisition unless an election applies.

One election is under subsection 45(2). If all of a principal residence is converted to rental use, you can elect not to be treated as having changed its use. The property can then be designated as your principal residence for up to four years. You must not designate any other property for those years and you must remain a Canadian resident. The election is made by attaching a signed letter to your tax return.

The trade-off is that no CCA can be claimed on the property while the 45(2) election is in effect. Claiming CCA on the rented area of a home also requires that you are not designating the building as your principal residence.

For a partial change in use, the CRA usually treats that part of the property as changed in use. The exception is where the rental use is relatively small, there are no structural changes, and no CCA is claimed. In that case the selling price and adjusted cost base are split between the personal and income-producing parts.

Only one home can be designated as the family's principal residence for each year. Sales and deemed dispositions such as a change in use must be reported on Schedule 3 and Form T2091(IND), even if the home was the principal residence for every year.

What to do next

• Confirm the CCA class of your building and the cost split between land and building.
• Ask your accountant to compare the tax saved each year with the recapture that could arise on sale.
• If you are renting out your home, decide before filing whether a 45(2) election suits you.
• Keep a running record of the undepreciated capital cost for each class.
• Get advice before selling, so recapture and the principal residence designation are planned for, not discovered.

Frequently asked questions