Francesca Giroux, CPA
For the Lakeside Leader
If you acquire a rental property that includes depreciable assets (i.e. building, furniture, appliances, or equipment) you may be able to claim capital cost allowance (CCA) for the year to reduce your net rental income and thus reduce your taxable income. When you purchase a depreciable property you cannot deduct the entire cost of the property when you calculate your net rental income for the year; however, since these properties wear out over time the cost of the property can be deducted over several years according to rates that have been determined by the Canada Revenue Agency (CRA). This deduction is CCA as mentioned above. Depreciable property is grouped into common classes, such as Class 1 (which includes buildings) and is deductible at 4 per cent on declining balance basis, and Class 8 (which includes appliances and furniture) deductible at 20 per cent on a declining balance basis. Declining balance means that you claim CCA on the capital cost (purchase price) of the property minus the accumulated CCA that has been claimed previously.
It is the taxpayer’s choice whether or not to claim CCA for any given year, a taxpayer can claim between zero and the maximum allowed. However, you cannot claim CCA to create or increase a rental loss. This means that you can only claim CCA to the point where net rental income becomes zero. You may not wish to claim CCA in a year if you do not have to pay income tax for the year, or if you want to avoid recaptured CCA upon the eventual sale in a future year. Recapture occurs when you dispose of your rental property and the proceeds of the sale of the depreciable portion of the rental property are more than the total of the undepreciated portion of the class at the start of the year (i.e. purchase price less total CCA claimed) and the capital cost (i.e. purchase price) of any additions during the year up to the original cost. The recaptured amount must be included as income on your personal tax return, as well as any capital gain arising from the sale. A capital gain occurs when the proceeds are greater than the original cost of the property, currently 50 per cent of the difference between the two is considered to be taxable income. The benefits to claiming CCA are that you will reduce your income tax payable in the current year increasing your cash on hand now; however, there is the possibility that you will have to include recaptured CCA in your income upon sale of the property, reducing your cash on hand in the future.
It is important to know whether or not CCA has been claimed on your rental property when in the process of selling the property to determine if you need to save extra funds to cover any recapture.
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Information provided is of a general nature. As each individual or company’s situation is unique, you may wish to consult with your CPA for information specific to your own needs.