It has been my experience that minimizing income taxes is typically the number one objective for many of my clients. Yet, some clients instruct me to not claim depreciation (the technically correct term for income tax purposes is capital cost allowance or “CCA”) on their rental property(ies), which results in a higher income tax liability.
I am further confounded when clients who have claimed CCA in prior years will not sell their rental property because they will owe income tax on both their capital gain and recaptured CCA (see detailed discussion below). Today I try and breakdown the reasoning for these counter-intuitive income tax positions.
A discussion as to whether or not one should claim CCA can become extremely complex when you consider inflation, purchasing power, discount values and present values. In an effort to not over complicate the issue, I will essentially ignore most of these factors; however, one must always be cognizant of them. For the purposes of today’s blog post, I will work under the assumption that you hold your rental property for 20 or so years and a dollar today is worth a heck of a lot more than a dollar 20 years from now.
When someone purchases a residential rental property, they can claim CCA at the rate of 4% on the building portion of the property (non-residential property may be entitled to a 6% claim). The land portion cannot be depreciated. In the year of purchase, only 50% of the CCA may be claimed.
For example: if you purchase a residential building for $800,000 in 2015 and you determine that 75% of the property related to the building and 25% related to the land, you will start claiming CCA on $600,000 ($800,000 purchase price x .75%). The allocation may be determined through negotiation with the seller and is reflected in the purchase and sale agreement, by appraisal or based on an insurance policy or other relevant information.
In the first year you can claim CCA to a maximum of $ 12,000 ($600,000 x .04% CCA rate x 50% rate allowed the first year).
In year two you can claim CCA of $23,520 ($600,000 -$12,000 CCA previously claimed x 4%). In all future years, the CCA claim is equal to the original cost of $600,000 less CCA claimed in all previous years x 4%. Technically, the remaining amount to be depreciated is called Undepreciated Capital Cost or “UCC”.
Thus, to the extent you can claim CCA; you have absolute income tax savings or a tax shield equal to the CCA you claim times your marginal income tax rate. Consequently, one wonders why anyone would not claim CCA if their marginal income tax rate was say at least 35% and they plan to hold the property long-term.
The reason some people do not claim CCA is a concept known as recapture. When you sell a building or rental property for proceeds equal to or greater than the original cost of the building, any CCA claimed since day one is “recaptured” and taxed as regular income. Thus, say you purchased the $800,000 building in the example 25 years ago and over those 25 years you claimed $350,000 in CCA. If you sell the land and building for $1,000,000, which is more than the original purchase price of $800,000, you would have to add $350,000 in recapture to your income and report a capital gain of $200,000 ($1,000,000-800,000).
At this point I could get into a technical discussion of the present value of the CCA tax savings over multiple years versus paying recapture 25 years later, however (1) I think it causes unnecessary confusion for purposes of this discussion and I don’t think most people even take this into account and (2) even though I am an accountant, I hated doing PV calculations in school, so if I tried to do them, I would probably get them wrong. But seriously, I have never had a client ask about the present value of their deprecation tax savings; they know intuitively a dollar saved today is typically worth far more than a dollar in tax paid in the future.
We can now discuss the second issue that confounds me in regard to CCA, that being some people are not willing to sell for the $1,000,000 we use in the example above because of the recapture they will owe.
Say Judy Smith purchased the property initially for $800,000 and she is in the 35% marginal tax bracket. If Judy sells the property, she will have to pay income tax on $350,000 of recapture and a $200,000 capital gain. The additional income tax that results from the sale for Judy will be approximately $220,000 (because she moved into the higher marginal rates).
Judy will thus net $780,000 ($1,000,000 proceeds less $220,000 tax), $20,000 less than her original cost. If Judy is like some people, she may not want to sell the property because she does not feel she made any money on the property. I have trouble understanding this position, since she would have benefited from the tax shield on $350,000 of CCA, which at a tax rate of 35% was worth approximately $125,000 and would have grown to between $200,000 (using a 4% return on the after-tax savings) and $260,000 (using a 6% return on the after-tax savings) and still broke even on her investment. If Judy did not want to sell because she feels the property still has large upside, or her tax rate would be lower in a future year and/or she cannot find another investment that can provide the same returns, that is another issue.
If Judy had purchased the property in 1990, she would need approximately $1,280,000 to purchase the property today (See bank of Canada inflation calculator).
In summary, I will typically recommend that a client claim CCA on their rental property. I also generaly tell them to not let the income tax due on recapture cloud a potential sale decision. In the end analysis, tax savings today are almost always worth more than taxes paid in the future, unless the purchase to sale period is very short.
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.
Hi Mark, great practical post! Would you typically recommend the same if the rental property(ies) are held in a corporation income? What about paying out rental profits as a wage to a lower income spouse rather than claiming CCA? I have done both in the past, and am interested on your thoughts on this... Thanks!ReplyDelete
It depends on whether your corp is a principal bus corp, personal tax rates and whether the wage paid to your spouse is reasonable. So no standard answer without reviewing the facts of the situation.
Hi Mark - what if your intention is to hold the property for a shorter period of time, say 1-5 years, would you still recommend to claim CCA?ReplyDelete
In that case it may not be the most tax efficient move, but would depend upon marginal tax rates and expected capital gain (assuming it would be considered capital)
OK - Thank you!Delete
Very helpful blog! I started reading one post and couldn't stop!
I bought a house in 2014 for 330k while renting out 2/3 of it. One year later I had to sell my house at a slight loss of about 14k after all fees such as mortgage penalty, legal and land transfer tax. I am planing to claim both terminal loss on the building and capital loss on the land on the rented portion of the property. While I was reading the CRA's example "Calculation A – Land and building disposed of in the same year" I noticed that they used FMW of the property.
My question is that should I used the actual sale price of the property in my claim? I suspect that the FMV could be a bit higher than my sale price since I did not use an agent.
Thanks in advance!
Sorry Mfman, but this is a complicated provision and section and I cannot comment without doing the calc myself which I have no intention to do.
Thank you for your blog. I bought a second house and lived it in for about a year and a half. I spent over 100,000 on renovations. I then moved abroad. Can I claim those renovations over time against my rental income?
Also, I had new windows put in on the house ... this year. Would that be a capital expense? Can I claim it as a current expense?
Thanks so much,
The fact you moved abroad could have/had a significant impact on your Cdn tax situation. I hope your received tax advice before doing so, if not you should do such.
I cannot provide advice on whether certain expenditures are expenses or capital without a detailed review of situation. Again, you probably should speak to an accountant about any issues you had immigrating and in respect of your rental property.
I used/took the equity from my primary house as the down payment to buy the rental property. Can I claim the equity loan interest as the expense for the rental property ?
Yes, however, if the equity comes from a line of credit and you are co-mingling it with other debt you will need to carve out the rental property debt as a percentage of the Line of credit.
Very good post. I am going to hold the rental condo until retirement. At that time, I sell the condo. Since I claimed CCA during the last 10 years, I have accumulated CCA,e.g $30000, which becomes my income, plus capital gains, eg. $60000. My total income would be $60000. Since I want to avoid tax as much as possible, I will use my accumulated rrsp quota (I have 100k accumulated in the past 10 years) to buy $40000 rrsp. Thus, I pay little tax. Is this reasonable?
Thanks a lot.
I do not provide personal tax planning on this blog. that being said, your plan may make sense dependent upon your marginal tax rate. Speak to your accountant or financial planner.
Thank you for your article. I purchased a rental property 2 years ago and have not claimed CCA as of yet. Are those years lost, i.e. too late to apply? Or would it just be a matter of adjusting previous tax returns (which I wouln't care to do)?
Since you dont want to adjust the CCA in prior years, you will just start claiming CCA when you determine you wish to do so. However, when you start you can only claim the CCA for the current year, you cannot catch up past years in the year you decide to start claiming CCA.
Great and to the point blog post. If one starts claiming CCA in this context (start when you wish to do so) on has to continue claiming CCA in the following years till the property is sold?
No CCA is discretionary each year, you do not have to claim.
Great post and great comment section on this one!
If I'm understanding, you're saying that once you claim CCA for the first time, you cannot go backwards in time from that point and amend your filings to claim it before that "First first filing".
The reason I ask is that I've got a warehouse I've owned for many years and have never claimed CCA, but upon reflection,, it would have been advantageous to have claimed it for the past several years. Can I go back and amend my taxes to make my first CCA claim in the past (say my 2013 tax return, 4 years ago) and then subsequently amend each year's taxes (after 2013?) until I get to the present day?
I am sorry, but I am not 100% sure of the CRAs position with respect to amending CCA, I have not had to look for a long time. Have your accountant check into it
What if the sales proceed after two years is 700000, resulting in a capital loss of 64480, still need to recapture the full CCA of 35520 and pay tax on it?ReplyDelete
Where there is a loss on the property as a whole, there will likely be a reduction or elimination of the recapture and maybe even a terminal loss depending upon all the facts. You would need your accountant to run the numbers.Delete
Thank you! Am i right to say that the same rules (capital gain tax, CCA recapture and elimination of recapture..) apply for canadian tax residence holding foreign rental properties?ReplyDelete
If I have claimed CCA for past years on a rental property, and if my income is very low in the present year, can I repay the CCA taxes this year while I am in a lower tax bracket?ReplyDelete
Can I borrow and repay the CCA whenever I want or would I be required to only pay it when the property is sold?
You cannot repay CCA when you want. It is only taxable upon the sale of the property. If your income is low, it may make sense not to claim CCA and thus reduce the amount you eventually have to repay. Speak to your accountant or get advice.
Thanks - this is really useful! A quick question on rental properties owned overseas, so if one is owned in Canada and another one is owned in the UK - assume that the CCA would only be relevant against the Canadian property. Even though I am declaring the UK income the tax basis in the UK would be applied when doing a tax return there, and it is almost irrelevant that it is rental income for the means of the Canadian one??ReplyDelete
Incorrect. While the original cost will be the same in both countries for capital gains purposes (subject to FX exchange), the depreciation/CCA can be different in both countries and result in far different taxes upon sale. The tax rules of each country guide the year by year rental income/loss claims.
This is very helpful. Thank you. I am contemplating the sale of a rental property and had assumed that any difference between sale price and UCC + original value of the land would be treated as capital gain. Obviously not. You explained how to deal with the recapture very well.ReplyDelete
Thanks for the excellent article. I'm wondering if you have a guideline for determining the building portion of a property? I have a typical condo in a 4-floor building of 97 condos. How to determine the percent of the value that would be building vs land?ReplyDelete
Many accountants allocate 80 or 90% to building and the rest to land for condos. However, that does not mean the CRA will accept such.
We bought a house 4 years ago and renovated the basement last year into a self-contained suite, which is now being rented out (it is about 1/3 of the house and we live in the other 2/3). Can we use 1/3 of the original purchase price of the house as capital cost?ReplyDelete
You should engage an accountant to review you situation. Once you claim CCA 1/3 of your house is not your principal residence. That may be the result anyways once reviewed, but you need to have someone explain to you the tax implications of the 1/3 rental so you can make an informed decision re the CCA.
Ok, thanks I think I will do that. One other thing though, if I claim rental income and expenses, would that also make 1/3 of the house not our principal residence, or is it just CCA that would trigger that?Delete
The CRA folio on principal residence says this:Delete
"It is the CRA’s practice not to apply the deemed disposition rule, but rather to consider that the entire property retains its nature as a principal residence, where all of the following conditions are met:
a) the income-producing use is ancillary to the main use of the property as a residence;
b) there is no structural change to the property; and
c) no CCA is claimed on the property."
speak to your accountant to review your situation in lieu of the above
Great article and good analysis. Question: if I sold one of a few rental properties (all in the same class) in 2016, have been claiming CCA on all these properties in the past years and now have a gain from sale of that rental property; then on my 2016 tax return, must I take a recapture of CCA taken on the sold property, or can the negative UCC of the sold property be lumped with UCC of the few unsold rental properties (all in same class)?ReplyDelete
Each rental property over $50k must be in its own class, you are doing this wrong if your properties cost more than $50k which I assume they do.
Thanks for your timely reply. Yes, I have calculated CCA for each of these rental properties (each over $50K) separately on separate CCA form. I just were not sure if a recapture of CCA taken in the past must be done on the one property sold in 2016.Delete
If I had a terminal loss on rental in 2016. What can be done with interest expenses on the LOC loan that continues after the sale? Do I eat it or is there still a place the expense can be claimed?ReplyDelete
Hi Erik, sorry you question went into my spam. You are not going to like this answer, butDelete
If you had a terminal loss in 2016 and sold the rental property, there are loss of source rules that may allow interest to still be deducted or not. However, these rules are very complex and you need to speak to your accountant or have a consult.
Glad to see you are still replying to comments on this post so many years later!ReplyDelete
I have a rental property of which 33% is my principal residence. I will be purchasing a single-family home this year and renting out the remaining space of the property, thus making it 100% rental.
In the first few years of ownership I claimed CCA, less so in recent years. When changing the status of the property from 66% to 100% I believe I will be required to declare a disposition at FMV.
Does this trigger a recapture? If so can the recapture be postponed until an actual sale takes place hopefully many years down the line?
What about capital gains? Will they need to be declared in the same year or can they be carried out as well?
Sorry, I don't answer specific personal tax questions on the blog and especially not change in use questions which are complicated and require time to review and research. If you have an accountant ask them, if not, get a consult, your question is not simple.
Hi The Blunt Bean Counter,ReplyDelete
I am having a problem convincing my accountant to claim the CCA for me. I am in a high tax bracket and I don't intend on selling anytime soon (I would like to keep the property as long as possible). I bought the property at least 10 years ago and have never claimed CCA on it and it is now at least 50K less than what I bought it for. The property is townhouse condo's of wood frame construction and I have had a net profit this year on rental revenues. I want to use the property value used in the 2017 property taxes but my accountant wants me to do a full appraisal and is stating that the appraisal must be done in the same year as the taxes. Can I just use the Property Taxes from 2017? Is it really that big a deal it the value is off by a few thousand? (typically property assessment by the city is a bit overvalued, probably to get more taxes)
I must be missing something in the translation as all this makes no sense. If you purchased a property ten years ago, the cost for tax purposes is what was paid originally, not what it is worth now and you don't need to value or look at the tax appraisal, if you have accurately outlined the facts.
IMHO it is your accountants job to outline the choices you have, claim CCA or not claim CCA and explain the tax consequences, current tax savings vs recapture
Once that is done, you need to make the final decision, it is not the accountants job to make decisions only outline the facts for the client to make the decision.
After googling many articles, I think I found the article that answers most of my questions. But I still have one more question.ReplyDelete
I want to take HLOC from my house and use this to buy a rental property. In this case, can I use to offset my rental income using CCA and can I still offset my regular income by substracting the interest paid for the HELOC. When I use CCA, my rental income almost become zero. But I have my regular job with income and I wanted to see if I can save some tax using the borrow to invest rule.
Sorry I don't provide personal tax planning advice on this blog, speak to your accountant or get a hour consult.
Hello, very useful information.ReplyDelete
Still have question:
I bought a duplex in 2009, but 5 years later moved to a house and rented the duplex. At this time I stared using the CCA. What value do I put in Opening balance of the underappreciated capital cost, The price I paid in 2009 or the market value in 2012 or, because I refinanced it (increased mortgage) the value per refinancing.
see what the CRA says-https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-127-capital-gains/principal-residence-other-real-estate/changes-use.htmlReplyDelete
Excellent post Mark,ReplyDelete
I have a question with regards to the info provided about the CCA recapture that has caused me a bit of confusion and your clarification would be really helpful.
Within the example stated in the post (will be posted at the end of this message), it says that the recapture would be $350
I am confused as to why the recapture would not be $150,000 instead.
I say this as 75% is allocated to the building and $25% for the land
Original amount allocated for the building was $600,000 (75% x $800,000)
Sale amount of building is $750,000 (75% x $1,000,000).
This being the case, wouldn't the recapture be the extra amount that the building appreciated ($750,000 - $600,000).
Your clarification on this matter would be greatly appreciated,
(original portion of the post: say you purchased the $800,000 building in the example 25 years ago and over those 25 years you claimed $350,000 in CCA. If you sell the land and building for $1,000,000, which is more than the original purchase price of $800,000, you would have to add $350,000 in recapture to your income and report a capital gain of $200,000 ($1,000,000-800,000)).
Unknown, the recapture is the amount of CCA (depreciation) you have claimed over the years up to the original cost. As it sounds, you are recapturing depreciation claimed in prior years. The only bearing the sale price has is that if the price is less than the original purchase the recapture may be less.Delete
I bought a condo 4.5 years ago, and have been renting it for approx. 2 years now and have never claimed CCA on the rental. My understanding is that CCA can't create a loss. However, can the CCA go against my income from the rental, and the expenses such as tax, interest, etc. create a refund?
Yes, you can claim the CCA against your rental income to bring the income to nil. However, as noted above, when you sell, the CCA claimed in all prior years will have to be recaptured as income in the sale year where you sell for more than the original cost.
I have a question related to your answer on Feb. 27, 2017 at 11:42. My wife and I bought a duplex for years ago. We rent out the top floor, roughly half, and live on the first floor. The reason to rent is to help with the mortgage. I did not know about the CRA practice regarding deemed disposition, so I have been claiming CCA on the rental portion to reduce the tax to $0. Have I lost the possibility of claiming the entire home as a principal residence? Would it be possible to amend past returns to not claim CCA? (I feel like I have made a terrible mistake for short term gain.)ReplyDelete
I am not sure if the CRA would allow you to amend, I have not had to deal with this issue before. I don't provide personal tax advice on this blog, but I would suggest you would likely take the position that only the rental part of your property was disqualified. You should engage an accountant to review your situation and assist you.
Hello, do you by chance know the answer to this now?Delete
Hi Jake, I have not looked at this for a long time, here are a couple links that may help you- but you should discuss this with your accountantDelete
My wife and I are going to rent our current principle residence and move to a new home elsewhere. Given current market conditions we believe our home has not appreciated since time of purchase, so could we file a deemed disposition and claim cap gains as 0? Furthermore, would we then claim CCA for the 3 years we plan to rent it before attempting to selling it again (likely for minimal to no cap appreciation from original purchase)? Or should we forego claiming CCA to avoid recapture?ReplyDelete
I don't provide specific personal tax planning advice on this blog. Speak to your accountant or engage one for this decision. There are a couple issues you need to consider, including the change in use rules, whether to file a section 45 election and the principal residence exemption
Hello The Blunt Bean CounterReplyDelete
Thank you for your great article!
Is the following statement: in case of selling the rental at loss, someone who has claimed the CCA in the past is better off since there is a chance the recaptured amount will be less? When in case CCA wasn't claimed, the tax amount paid cannot be reversed?
sorry I don't understand your question, please clarifyDelete
I'm not sure if my previous post was sent, so i will try again...Is it mandatory (in Ontario) to claim the CCA depreciation as an expense every year after purchase of a rental income property (i.e. a condo)? And if not mandatory, and you do not expense this yearly, will CRA still charge you with CCA depreciation recapture upon sale of the property?
Not mandatory, it is discretionary and if you do not claim, the CRA will not recapture. It only recaptures actual CCA claimed.
Hey Blunt! Great stuff!ReplyDelete
As a resident of Canada, does the rental property need to be in Canada to be applicable? How about a rental property outside of Canada?
You can claim CCA on a foreign property as a resident of Cda (however, understand how this impacts the foreign jurisdiction if you file a return there also), be sure to report the property on your T1135 if applicable.
Great Post indeed!
How do we claim CCA on a property where we lived for say 5 years and rented it out in year 6. Where the depreciation year start?
What value do I put in Opening balance of the underappreciated capital cost, The price I paid in 2012 or the market value in 2018 or, because I refinanced it (increased mortgage) the value per refinancing.
This is complex and may require the filing of an election or not. You need to speak to your accountant about this or consult with one to make the best decision and understand your options. I cant answer this on the blog.
I have a few rental properties with one partner. We're joint tenants. If one partner claims CCA depreciation for a few years and the other doesn't, what happens in the eventual sale by the surviving party? Is the survivor responsible for the CCA claimed by the deceased partner if he/she eventually sells?ReplyDelete
I don't follow. If one partner dies, there is a transfer to their spouse tax free or a deemed disposition in which case from memory I think the depreciation is recaptured; neither scenario affects the partner.
Quick question - I have a rental property (which I started to rent in 2016) where I have never claimed CCA. What balance do I calculate the CCA on if I wanted to start to depreciate for the tax year of 2018? Do I use the value at 2016 as a base for CCA or the depreciated value as at 2018?ReplyDelete
You would use the initial purchase price plus any legals, land transfer tax etc. Once the total cost is determined, you then have to allocate a portion to land and a portion to bldg. You can depreciate the bldg. portion.
Great article. Thank you for posting.ReplyDelete
I have a condo townhouse purchased in Apr'17. Last year, we didn't enter any CCA details in the FY'17 tax return.
1. Now that I want to claim CCA, should I enter it as a new addition or put in a UCC value at the start of the year (even though it's not part of the FY'17 return)?
2. Also, read multiple blogs and articles on the building value vs. land value of a condo and the amount that can be depreciated). How do I calculate the amount eligible to be depreciated?
For land vs bldg there is no correct answer. Some people use an estimate, some people use insurance values, i cannot give you a definitive answer.
You really should have entered the details in your 2017 return even though you were not claiming CCA so the CRA would have known you had the property.
I would show it as an opening balance, but understand you may receive an inquiry from the CRA as to where it came from and you may need to explain the situation to them
What an informative post! Guess u can tell CCA continues to boggle some of us, as I am reading this post in 2019 lol
Just a quick question. U stated :”In the year of purchase, only 50% of the CCA may be claimed.”
So if I have not claimed any CCA on a rental property but now in year 6 decide I need to claim CCA, it is the first year I claim CCA but is not the purchase year, so I don’t have to follow the 50% only requirement, correct?
Also, unrelated to this particular article, but do you have an article about the change-of-use rules and how that affects capital gains? I don’t quite understand the part where if you move back into a former rental property and it becomes your own principal residence, u can claim this up to four years before you actually move into the property.
Correct, the 50% rule will not apply in year 6.
The change in use rules are very complicated, you will need to consult an accountant to work through the ramifications. I dont have a specific article on the change in use rules
Hi Mark! Great article - thanks.ReplyDelete
One quick question. We have 5 rental properties in a holding company (52% tax rate) and we never plan on selling them. They net about $70K a year now. Once they are fully paid off, we will use the rental income to live out the rest of our lives and our kids/estate can deal with the taxation issues when that time comes. Do you still suggest claiming CCA now - I ask because my tax bill owing is $25K. The CCA depreciation would have brought this down significantly. My current accountant doesn't think that we should claim it now but it seems like saving the money now is better than saving the money for the future tax bill (which may never come if we keep them for our entire lives)
In your circumstances, I would definitely consider claiming CCA. I would have your accountant explain why he/she does not think you should, especially given you plan to leave to your kids- although at some point you should consider planning to minimize your estate taxes.
One of the more informative articles I have found, thanks!ReplyDelete
My question pertains to the sale of the rental property.
I understand that when calculating the claimable amount of CCA, I am able to add the cost of land transfer tax and legal costs at the time of purchase (and need to account for what portion of the purchase was for the building) to the original purchase price.
For the purpose of paying capital gains when I eventually sell, do these same two expenses that I paid upon purchase of the rental property (legal fees and Land transfer tax) get added the purchase price? Being able to add these expenses(approximately $6000) would increase the purchase price and thus reduce my exposure to capital gains.
Yes, your cost base when selling is equal to the purchase cost plus the legal and Land transfer cost upon purchase.
This is a very helpful article. I have a question regarding when to start claiming the CCA. I bought a second property in late 2019 that will be used exclusively as a rental property once I complete some minor repairs. It will not be rented until sometime in 2020 so I will not have any rental income to claim in 2019, only expenses. I plan on claiming the CCA. Should I start claiming the CCA on my 2019 taxes or do I have to wait until 2020 when the building is actually rented and making income?
Thank you in advance.
You have to wait until 2020 when it is put into use
You say : "If you have more than one rental property, you can claim the maximum CCA even if it creates a loss on one property, if the net income of all rental properties does not become negative." I understand this perfectly but now let say:
I have 2 rental properties 50% with my spouse, these 2 I can take CCA on them. I have also a rental property that is only 100% to me and no CCA possible on it (paid and abroad).
Let say I have:
property1 (50/50): overall rental income 5000 (max cca possible=6000)
property2 (50/50): overall rental income 8000 (max cca possible=14 000)
property3 (me only) : overall income 10 000 (no cca possible)
Do I take the max CCA for both so my own rental revenue will be minimum (best solution for me) but my spouse will be negative (is it authorized or will the number be written "0") ?
And is it possible for my spouse to give me the CCA she does not need for this year so I can lower better my income rental?
Sorry for these questions, but I am trying personal tax softwares this year and not a single one give me the same results..!
Thank you for reading and continue your great work.
Sorry, your question is beyond the scope of what I want to answer on the blog. The issue is do you have a partnership with your wife or a joint venture with your wife, both have different tax issues in the way you claim CCA. You need to speak to your accountant or engage one.Delete
Thanks for the article. I have a multi-part question that I'm hoping you won't mind answering:
A. We've purchased a cottage, which we plan to rent out part-time for extra income. From what I understand, I'll only be able to claim CCA for the percentage of the year that the cottage was a rental. however, I'm unclear re how this period of time is calculated Is it the number of days the property was rented? The number of days the property was *listed*?
B. From what I understand, another implication of taking the CCA is that you lose the ability to use the Principal Residence Exemption to minimize tax on capital gains upon sale of the property. I can't figure out if this is something to worry about or not: my principal residence is *probably* going to be the one with the higher capital gains - but it still seems like it could be advantageous to have the option to call the cottage the PRE for certain years. How concerned should I be about losing this option?
C. Combining (A) and (B) together, since my CCA-based tax deferral savings are likely to be modest (e.g. based on renting the cottage only 25% of the year), and those modest savings would remove the ability to claim the PRE, would you still recommend taking the CCA?
D. Finally, a quick one: Do I lose the PRE if I claim *any* CCA (e.g. on dishes, furniture, etc.), or only if I claim CCA on the cottage proper?
Thanks so much for your time,
sorry, Matt, I dont mind answering quick questions, but this is way too long to answer and not necessarily simple -you should speak to your accountant or engage one.Delete
Makes sense - my apologies. I don't think I realized how many questions I had when I started writing.Delete
Perhaps you could just answer the one that's *actually* quick? Do I lose the PRE if I claim *any* CCA (e.g. on dishes, furniture, etc.), or only if I claim CCA on the cottage itself?
Hi Matt, believe it or not, I have actually never looked into this, because I would rather not even start up with the CRA by claiming any CCA related to the PR.Delete
I have a condo unit which I took occupancy Nov 2018. I rented it out Feb 2019 to present. I did not officially get title until Mar 2020 hence the final purchase price is not known until Mar 2020. My question is, when I'm reporting for 2019 can I still establish the price so i can take CCA when in actuality the purchase wasn't closed until mar 2020?
Each province has its own rules -you currently have an interim closing and thus legally you do not own the unit until Mar 2020 when the final closing occurs -thus in general, you cannot general claim CCA until final closing.
Great Article, thank you.ReplyDelete
I have 3 residential properties i rent out, can i claim the full purchase price for each as the capital value portion for depreciation purposes? The insurance coverage for each rebuild is greater than the purchase price of the properties.
No, you have to allocate between land and building on the actual purchase price, not the insured valueDelete
Thanks, so how close to zero can you go for land? Seems that it would be common to have the value of a building greater than the purchase price (in my small town anyway). Of course the land would have a value if it were vacant too, but I dont think you can compare this with a vacant lot since the value of a vacant lot is almost completely dependent on the fact that a building can be placed on it. A vacant lot in a residential area would be near worthless without the ability to place a house on it. Sorry for getting all hypothetical. Thanks for the great resource.Delete
The typical split for many people is 75% bldg and 25% land, but I have seen 90/10 where the land has minimal value. But again, some attempt should be made to have an accurate allocation based on the actual property facts
Thanks for the great article!ReplyDelete
If you have a rental property that have been claiming CCA for a while, and you do some renovations, do you claim that whole amount as CCA? Do you add that amount to the remaining UCC? Thanks!
Typically the reno would be added to the UCC
I bought a residential property in 2011 and lived with it until 2015 when I purchased another property. I rented it from 2015 without claiming CCA and reporting a change in use. I sold the property in 2019 and filing return now. Can I claim a CCA to reduce the tax owing?ReplyDelete
The CCA would be exactly equal to the recapture, so I don't see any benefit unless I am misunderstanding you.
I bought a property in 2016 for 400k and let's say sold it in 2019 for 600k without ever claiming CCA.
This means I will have a capital gain of 200K and 100k is taxable correct?
There are no subsequent calculations for CCA not claimed in previous years no?
Yes, CCA us only an issue if ever claimed. But your cost base may be higher with the original land transfer and legal costs and any capital improvements during ownerhsip.
Thank you very much for your great article. If I pay additional instalment for my mortgages (for example 18, instead of 12 per year), does the yearly interest cost increases? In this case, I can report lest amount of taxable income!
You would need to get an amortization schedule for your mortgage to see the difference, but likely you would have greater interest upfront to write off but less deductions in the future since you have paid off your mortgage quicker.
Thanks for clearly explaining UCC and recaptured amount on CCA.
Simple and clear for me. Examples always work best for me.
I was getting frustrated with superfluous language in my textbook and having a difficult time finding someone who could explain it so simply.
Thank you much!
glad I could helpDelete
Hello Mark. Can I start claiming the CCA in 2021 on my rental property I purchased in 2012 on which I have never claimed CCA for the building? If so, at which value (I presume it would be the FMV of the property in 2021)?ReplyDelete
Yes, but not a FMV, it would be at the original cost less the land portion. CCA is based on cost not FMV.ReplyDelete
Thank you for the answer.Delete
That property was purchased in 2002 but converted to a rental property in 2012. Do I use the 2002 purchase price or the 2012 conversion FMV? If I have 2 rental properties, do I need to claim CCA on both at the same time? What if I sell one but not the other? ThanksReplyDelete
Hi Maciej, the facts are now complicated and I am not sure how you reported or did not report the change in use in 2012. You need to speak to your accountant or engage one, the answer is now beyond the scope of this blogReplyDelete
Thanks, I will.ReplyDelete
Hi, my spouse has a much higher income than me. Am I able to claim all or most of the rental income in order to pay less tax? On title, we are 50/50 owners but the downpayments all came from an inheritance I got. Thanks!ReplyDelete
Not sure if there were valid reasons why you put the house 50/50 when it came from your inheritance and you are the lower income spouse, but now that you did, you need to speak to your accountant or engage one. Discuss your wishes in context of the attribution rules with them, they may or may not be able to offer a solution
Thank you for explaining the recapture aspect of the CCA. We sold our rental property, a small triplex in Montreal, in 2020. We are non-residents of Canada, we live in the US. We paid our taxes and received our certificates of compliance from CRA and Revenue Quebec. We are now working with a CPA to file our Canadian and Quebec tax returns to get a partial refund of taxes paid. We recently received the paperwork and were surprised to see on the Quebec return that in addition to capital gains, recapture was added as rental income on line 136 of TP-1.D-V. We never claimed CCA in Quebec as we are non-resident and never had to file a return in Quebec, only Canada (section 216). Why would we have to pay tax on recapture to CRA and Revenue Quebec?
Thank you in advance,
Sorry Michelle, I live in Ontario, I have no knowledge of Quebec taxesDelete
If convert my principal residence to a rental property is the CCA based on the price at conversation or the original price when I first purchased many years ago.ReplyDelete
If it's price at the time of conversation how can this be determined if I never sold it? Through MPAC assessment or listings of similar properties in the area. The former is much lower value
This is a loaded question and you need to speak to your accountant as you may be better off filing an election to not convert your PR to a rental property. If your conversation leads to a conversion, I have my clients obtain a real estate appraisal at the date of conversion.
Curious as to why this only makes sense when marginal tax rate is over 35%? wouldn't it work at any marginal tax rate?ReplyDelete
Yes, but as your marginal rate drops, your tax savings become smaller and smaller and therefore not worth the deduction at some point since when you sell the recapture of the depreciation will likely be at a high rateReplyDelete
We fully paid our condo townhouse we live in now and plan to buy a new home this summer. The condo we would like to turn to rental prop.
We intend to re-mortgage the condo and use the money for downpayment to the new home. can we deduct mortgage interest from rental income? Thanks
Hi Unknown, the interest deductibility rules are subject to tracing the use of the funds for investment purposes; since they will be used to buy your personal home, I think you are likely out of luck. Speak to your accountant, depending upon what other assets you have, maybe there is a way to make some of the interest deductible.Delete
Thanks for your great insight on CCA. My wife and I own (jointly) and rent a condo since 2014 (bought new). I never claimed CCA. I would like to do so for 2020. The building is a low-rise with 12 units only:
- What % of land should I account for in my calculation?
- What value should I use for UCC at start of year? purchase price (minus land) or FMV in 2020?
- Can I claim CCA only for me (not for my wife as she has no tax to pay)?
In paragraph 5 I discuss some of the ways to determine the land/building component, I cannot provide a %. The UCC would be the original purchase price allocation to building, not the FMV
The last question is subject to the legal status of partnership or jt tennancy etc. I dont want to get into this.
Many thanks Mark. I plugged some numbers into my tax tool. I used 30/70 for land/building % with Class 1. The good news I was able to clear the tax to pay (~$4K). The not so good news: I created refund... I understand that CCA can't create a loss for the rental income but not so sure if creating a refund will be accepted by CRA. Thanks again for clarifying this point. Best regards. Andre.Delete
As long as you are not creating a rental loss by claiming CCA, you can claim a refundDelete
When I applied CCA on my rental in my tax tool, I noticed that the CCA amount to claim was not divided between the joint owners of the property (in this case, me and my wife 50/50). Is this always the case or I should apply somewhere/somehow the 50% just for me?
Happy Easter and kind regards
you are likely filing out the form incorrect, there should be a question about the name and % ownership of others so the software claims the reduced amount, cant help you more than thatDelete
IN 2020 I sold one of 4 rental properties. I didn't claim CCA so no need to recapture. Can I calculate and claim depreciation to reduce capital gains?ReplyDelete
Not sure I am clear, if you are saying you want to claim depreciation on the property you sold, makes no sense. IF you are saying claim CCA on the other 3 properties to reduce the gain,that is possible as long as you dont create a rental loss with CCADelete
Thank you! this was super helpful...I bought a rental property in 2020 and plan to rent it out for at least 15 years. What was confounding me was IF I should even claim the CCA (approx $840 for 2020) since I don't owe taxes this year (and usually don't ever owe due to RRSP contributions!). So my question is: if I include the CCA calculations on my taxes but input 0$ in the claimed boxes, what happens to the accumulated CCA over the years - is it just a paper trail from CRA & me? Could one claim several years at once to offset capital gains: for example if I decided to sell and the sale generates a capital gain OR more likely I convert it from 100% rental into a 100% primary residence ("Change of Use" according to T4036 is also considered a sale). I figure if I don't need the $ "credit" of the yearly CCA, why not let CCA accumulate and then apply it against the "income" I get from either selling it or selling my primary residence and making the rental my primary. *fun fact the ratio of land to bldg when I own is the reverse, land was 70% of the value!ReplyDelete
You can only claim CCA based on your undepreciated balance, thus if you dont claim CCA in a year, it is forgone, you cannot have a "super catch up" for unclaimed CCADelete
Thank you for the practical advice, and in clear language! Enough technicalities to understand the intricacies of PV and FV, etc yet a clear bottom line. Also appreciate the humor. This was just the exact advice I was looking for. Great writing, too!ReplyDelete
Great article, very informative! Thank you.ReplyDelete
Is it worthwhile claiming CCA on Class 4-Building or using the CCA on a Class 8 item (air conditioner) first?
I have a rental property and am considering using Class 8 CCA first and applying the balance to Class 4, each year. When the Class 8 is zero after 5 years, future CCAs will apply on the Class 4.
CCA is being applied fully to Class 4 automatically by the tax software, and based on your response will make changes, if required.
Would appreciate your comments/thoughts please.
If you only need so much CCA and the Class 8 item provides enough tax shelter, i would go with Class 8 as any class 4 CCA will likely be recaptured in the future and the Class 8 is far less likely to have recapture.Delete
Very good article. ThanksReplyDelete
My wife owns a rental condo since 2016, never claimed CCA in prior years; we are planning on doing it this year.
According to CRA website, if this is the first year claiming CCA, then column 2 (UCC) doesn't have to be populated.
Am I reading that correctly?
I presumed, we'll need to enter the original purchase price as the starting point.
You should have reported the condo on the s(8) from day 1 even if not claiming CCA. So I would take the position column 2 should be used to report the original cost this year. You don't populate Column 2 in the year of a purchase so your reference is out of context, since your purchase was in 2016.Delete
Hello Mark! I have been scouring the web for an answer regarding CCA for ‘used’ furniture, and I’m hoping that you can help.ReplyDelete
We bought a condo, which came fully furnished (beds, dressers, appliances, dining table etc). I understand that these are Class 8 depreciating assets which I paid for in the purchase price. My question is: how do I place a ‘value’ on these for use in the CCA? Is it the cost to replace? The current fair market value? Something between (or neither)?
Thank you VERY much for any guidance that you can provide!
The original purchase agreement should have allocated the purchase cost amongst the items purchased. Since that was not done, I would go with the fair market value which is likely very low for these type items
Thank you, and very much appreciated!Delete
I very much appreciate your comments and especially the many and varied questions and answers that follow.
I'm wondering if your original advice about claiming CCA still holds for a relatively short rental property ownership (~10 years) and in these days of inflated housing prices? Our rental has increased 85% in 5 years. Isn't 100% of the recaptured CCA taxed instead of 50%?
Yes, all recapture is taxed assuming you sell for more than the original cost. I don't see where I said only 50% is taxed? Anyways, it is a personal decision, if it was me and my marginal tax rate was high, I would claim CCA even if less than 10 years, but I have clients that would not.
Hi. For a condo that was converted from residential use to an unfurnished rental some years ago (2007) and recently was renovated in 2019 to a furnished rental, will the cost of Class 8 assets added as part of the recent reno be deductible as terminal losses (no CCA claimed) in the year of sale if the purchaser does not want these and they are not usable/saleable elsewhere? Or does the remaining undepreciated value of these Class 8 assets offset the capital gain on the sale of the condo? In other words, would the overall ACB on the sale include the value of the condo as well as the separate Class 8 assets?ReplyDelete
sorry too complicated a question for a blog because I would need to go through the various changes in detail before I could answer.Delete
Hi Mark -ReplyDelete
Great article. Question for you regarding a working class person with a rental property on the side, who wants to sell in a decade or two: If a person tends to earn more wages (beyond inflation) as they advance throughout their career, it would seem that claiming CCA each year would push more of the recaptured income from sale into the top tax bracket (assuming you can't wait until retirement to sell). Does this change your math? Do you have any advice, thanks!
If your income tax rate will increase over time, you would definitely have to consider whether to Claim CCA or not. It would be a question of the increase in your tax rate vs the PV of current tax savings. I could not give you an answer without doing a lot of work which i am not going to do :)Delete
Thankyou for this great blog posting. This stuff is so confusing! A few questions:
A) Normally wouldn't the portion allocated to building be a lot less than the building, since its land that appreciates in value? I.e. would it not be something like building 10% vs. land 90%. When I get my property tax assessment from the city the building is not even worth 10% of the assessed value of the entire property.
B) If I've held a rental property costing $800,000 for 10 years and taken the relevant CCA on the building portion, and then I sell today. Say I sell today for $1,000,000 - wouldn't that $1,000,000 first have to be allocated btwn land and building before determining whether or not there is recapture?
a) no, the building in general is more costly than the land, you buy land for x, but to build out it costs x plus- think of how much it would cost to build your house from scratch. I would look more to your insurance allocation than your realty tax bill.
b)if the rental cost $800k originally and you allocated say $500k (63%) to bldg and $300k (37%) to land initially, the $1,000,000 would in almost all cases require you to add back $500k to the UCC causing recapture of any CCA over the years.
Got it thankyou so much!!!Delete
Excellent post and we are greatly appreciate you taking the time to answer our questions.
A short question...
Can the building/land portions of the purchase price used in the CCA calculation be established by the municipal evaluation of each for the year the rental property was acquired?
Municipal valuations are not necessarily accurate for land and bldg allocations but can be considered. Many people first consider the replacement insurance on the building as a basis to start with. There is no absolute correct method if the allocation was not in the original purchase agreementDelete
Thank you so much for this article. Quick question:ReplyDelete
If I don't want to claim my CCA ever (I have my reasons! haha), do I need to note the value of my rental property in the T776 form at all?
IF so, do I just simply enter $0 for the amount of CCA to deduct in column 12 and therefor my UCC is $0, keeping my property overall at the same price I originally put it on the books at?
Technically you should probably note cost of property and ensure you make nil claim every year.Delete
1- I changed my principal residence (codo) to a rental property a couple of years back, and now I wanna claim it back again as a personal property. I only claimed property taxes, mortgage interests as deductions on the rental income ( I was non-resident for tax purposes during this period). I understand now that there might be a capital gain tax due to change of use, but can I defer that amount till I actually sell the property ? Are the deductions mentioned above considered CCA and hence I'm not allowed to do the deferral?
2- Also, the "change of use" technically happened 2 years ago(2018) and I haven't filed my taxes yet, am I still eligible for the deferral request ?
sorry, too many facts and too complicated a situation to answer on a blogDelete
shorter question: If I claim mortgage interests and property taxes as deductibles from rental income, can I defer paying the capital gain tax when I claim back the property as principal residence ?Delete
It is not a question of shorter or longer, your issue is complex with a change in use (no timely election) non residency and a change back. You need to have an accountant go through your entire history to provide the proper advice.Delete
Okay I understand, thanks. But regardless of my particular situation, are soft costs (mortgage fees and property taxes), part of CCA or they're totally different deductibles?Delete
those costs would typically be deductible from rental income (mortgage fees may have separate treatment depending upon the nature of the fees) and not CCA and if personal property typically not included in calculating the costDelete
Thanks a lot!Delete
Hi, I'm a little confused. So I bought an investment property (condo) in 2020 for $400k, the building is about 5 years old, I don't use it at all for person use, rental income is $2140 per month. What class would this fall in and what amount should I put?ReplyDelete
typically class 1Delete
can I choose not to claim CCA for the building and land but do it only for new purchases like Refrigerator or Washer/Fryer? and if so would the recapture apply to the extent of the items I am claiming CCA for or the whole rental property?ReplyDelete
Hi Anon, yes, you can claim CCA only on the appliances. Recapture would only apply only the appliances (which is unlikely since they lose value over time).ReplyDelete
Hello. I have rental owned 50/50 with my spouse. On the CCA area of form T776...ReplyDelete
If the house value is 400,000 and the land value is 150,000 do I use those amounts on both of our T776 CCA area's or do I use half the above amounts on each of our forms. ie) 200K house value and 75K land value on my and CCA form. and the same on my spouses form?
Is it a big deal either way?
A partnership calculates capital cost allowance at the partnership level. In a joint venture, co-venturers may claim as little or as much CCA that fits their situation. Assuming you are a partnership with your wife, you would claim the CCA on the $400k as a partnership, then split your allocation 50/50. The T776 form is set up for that to happen.Delete
I own two rental properties- a duplex in Canada and a house in the U.S. I've claimed CCA since purchasing for the Canadian property but have never for the U.S. house. Last year and this year I had a tax service do the past 4 years of IRS returns . Unbeknown to me CCA was claimed for each return. Now this will increase my capital gains tax when I sell. Do I have to now claim the same IRS CCA on my CRA return?ReplyDelete
This year I did 2021 and 2022 paper returns myself and did not claim CCA for either property. I'm thinking opposite of your advice; I did return with and without CCA to see the difference for 2021 I would get a much bigger refund for 2021. I owe almost $4000 without CCA for 2022 and am debating to redo for them or the umpteenth time . Overall, my math isn't so good but how is it better to claim CCA now but when selling, pay more ( than if I pay the $4000 I owe at my current tax bracket) in capital gains tax ( 50% now but can always go up) because the UCC was reduced by claiming CCA, i.e, creating more of a profit/gains? And, any recaptured cost is taxed at 100% , and any net from the sale is added income, most likely putting me in a higher tax bracket unless I had no employment income. Or I could die tomorrow and not worry about the future at all.
A lot to unpack here. You say "I am thinking the opposite of your advice". First of all, I don't provide definitive advice in this blog. I provide a discussion of claiming CCA and not and my opinion at the end was in many circumstances I end up suggesting clients claim CCA, but I did not provide a definitive opinion one way or the other.
Secondly I don't provide personal tax planning advice on this blog, especially when there and US and Cda tax issues.
There are different rules for claiming depreciation/CCA in both countries. See this article on how US depreciation works https://es-cpas.com/canadian-income-tax/canadians-with-us-rental-properties-taxation-of-us-rental-property-income/
My suggestion is your situation is somewhat complicated and you should use a Cdn accountant or at minimum, have a consultation with one. It would be best if they have a basic understanding of US tax, but if not, they may need to co-ordinate their advice with the US accountants advice
You need to speak to your
This is a fantastic blog. We purchased a rental property in 2018. 100% rented for all the years owned. We sold in 2022 for higher than we paid.ReplyDelete
I have never claimed CCA. Is it to my benefit to claim CCA now?
No benefit and technically you cannot anywaysDelete
How many years in a row can you use CCA to bring your rental income down to zero (assuming that there was a net rental income after expenses). Does CRA have an expectation that there will be a taxable profit made at some point?ReplyDelete
There is not a restriction on how many years you can claim CCA to eliminate your profit. The CRA is ok with you having net rental income and reducing it by CCA.Delete