Claiming Capital Cost Allowance on a Rental Property
Capital Cost Allowance is a deductible expense (taken off your taxable income) for the depreciation (wear and tear) of something. More specifically, Capital cost allowance (CCA) is the depreciation of fixed assets, excluding land, that is allowed to be claimed as an income tax deduction. A portion of the expense is deductible each year CCA is claimed.
Taking CCA on depreciable rental property allows taxpayers to write off the capital cost of the property or interest in property over time. Generally, in the first year that the asset is acquired, only 50% of the applicable CCA rate is allowed. The asset is subsequently expensed on a declining basis at the applicable rate each year. However, for certain kinds of depreciable property, the 50% rule, or half-year rule, does not apply.
Depreciable properties are grouped by class, and a property of the same type may belong to a different class. Each class corresponds to its own rate for capital cost allowance.
CCA is calculated on a declining basis, based on the enumerated rate and the undepreciated cost of the property that year. For each year that CCA is claimed, the prior year claimed is subtracted from the capital cost of the property, until the property depreciates to zero or is disposed of or lost. The full available amount for CCA does not need to be claimed in full of each year– a lesser amount can be taken to save the balance of the entitled allowance for subsequent years to reduce income.
If the fiscal year is shorter than 365 days, the capital cost allowance is generally prorated for rental property.
Class 13 Property that is a Leasehold Interest
A leasehold interest is the interest of a tenant in any leased real property. Capital cost allowance can be claimed for leasehold interests that incur capital cost. A leasehold interest is not considered to be depreciable property unless there is a capital cost incurred in respect of that property. For instance, additions for the leased space paid for by the tenant is a capital cost; the leasehold interest is now considered depreciable property with the incurrence of the capital cost and provides a deductible amount under CCA. Common lease periods for real property range from five to 10 years.
The capital cost of a leasehold interest of rental property depends on the type of leasehold interest and the terms of the lease. For Class 13 property, the capital cost of a leasehold interest would include the amount that the tenant expends to improve the leased property that are capital in nature, such as the amount the tenant expends to obtain or extend a lease or sublease. If the tenant pays the landlord to permit the sublease of property, capital cost allowance may be claimed. However, amounts paid by a tenant to cancel a lease are not included in the capital cost allowance. The half-year rule does not apply for Class 13 Property.
For buildings on leased land, separate classes are applicable.
Class 1, 3, and 6 Rental Property
For owners of rental property, capital cost allowance would include the purchase price, associated legal fees, GST/HST or any provincial sales tax, and the cost of equipment and furniture associated with renting a building. Land itself is not depreciable property, but depreciable property on land, such as buildings, are included. Only the costs related to the depreciable property can be claimed under capital cost allowance. CCA can be claimed once the property becomes available for use or when it begins to earn income.
Furthermore, the sale of a rental property may result in the recapture of your claimed depreciation being added back into your income. Recaptured amounts occur when the proceeds from the sale of the property exceed the remaining undepreciated capital cost on the property. The total cost of the depreciable property in the class subtracted from the prior claimed allowance is the remaining undepreciated capital cost. When claiming CCA, the allowance lowers the taxpayer’s tax liability through lowing their taxable income, but upon the sale of the property, prior claimed CCA amounts are recaptured and taxable.
Consequences of Claiming Capital Cost Allowance
Given the upward trend of real estate, any depreciation taken may be included back into the taxpayer’s income upon a sale of the property. Any profit earned on rental property is treated as a capital gain and taxed at 50%. However, recaptured amounts are taxed at 100%. If there is no depreciable property left at the end of the year but there is still outstanding CCA that could be claimed, a deduction to your income may be allowed, known as a terminal loss.
When you sell a property, all of the CCA or depreciation previously used will be counted as regular income so it is extremely important to review your situation to determine whether claiming CCA is the right tax move. Here at Rosen Kirshen Tax Law, we would be happy to review your situation and determine the most efficient tax plan for you! Call us today!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.