Claiming Capital Cost Allowance on Rental Properties
What is Capital Cost Allowance (CCA)?
In simple terms, CCA is the tax equivalent of depreciation for tax purposes. CCA is a discretionary tax deduction that can be claimed to represent the drop in value of a capital asset, as it used over time.
CCA is calculated by applying a set percentage (allowance rate) to the Undepreciated Capital Cost (UCC) balance of a capital asset or class at the beginning of the year. UCC represents the tax cost of the capital asset in a current year.
Where a taxpayer owns a rental property, CCA is calculated on all capital assets associated with the rental property with the exception of land, and the cumulative CCA can be claimed to reduce net rental income reported for tax purposes.
When a rental property is purchased, or there is a change in use, for example a principal residence is converted to a rental property which necessitates a valuation of the property at that time, it is important the cost or valuation is broken out between land, building and other capital assets associated with the rental property.
An example:
In 2020, an individual taxpayer purchased a newly constructed house as a rental property for $500,000. The realtor broke down the cost and appraised the house/building at $400,000 (80%) and the land at $100,000 (20%). The individual has no other capital assets to consider.
Most residential rental buildings are considered Class 1, which has an annual CCA rate of 4%.
How much CCA should be claimed?
For a rental property, the total CCA that can be claimed is limited to the cumulative amounts calculated (UCC * allowance rate) per asset class, and net rental income. In other words, CCA cannot generate a rental loss, which would otherwise offset other sources of taxable income.
Our example:
In the current year, net rental income of $15,000 (rental revenue less expenses such as mortgage interest, property taxes and insurance) was reported by the individual taxpayer. The opening UCC for the building was $400,000, thus CCA of $16,000 was calculated ($400,000 * 4% as it is a Class 1 capital asset).
However, as net income was only $15,000, only $15,000 of CCA can be claimed, reducing net rental income to $nil.
What happens when a rental property is sold?
When a rental property is sold, there is the potential for a capital gain or loss, recapture or a terminal loss to be reported for tax purposes. Generally, a capital gain or loss is calculated as the proceeds of disposition (sale proceeds) less the original purchase price, however if CCA has been claimed on the rental property, the tax cost of the asset, represented by UCC, is now different from the original purchase price.
Our example:
In 2025, the individual taxpayer sold the rental property for $750,000. The realtor appraised the house/building at $600,000 (80%) and the land at $150,000 (20%).
Let’s look at two scenarios:
- No CCA was claimed over the years, and the UCC for Class 1 is $400,000; and
- CCA of $50,000 was claimed over the last five years, and the UCC for Class 1 is $350,000.
| Scenario 1 - No CCA | Scenario 2 - CCA Claimed | |||
| Land | Class 1 - Building | Land | Class 1 - Building | |
| Sale Proceeds (A) | $150,000 | $600,000 |
$150,000 | $600,000 |
| Original Cost (B) | $100,000 | $400,000 | $100,000 | $400,000 |
| Capital Gain (A-B) | $50,000 | $200,000 | $50,000 | $200,000 |
| UCC (C) |
- | $400,000 | - | $350,000 |
| Recapture (B-C) | - | - | - | $50,000 |
When a property is sold for more than its original cost, a capital gain results as indicated in both Scenarios 1 and 2 for both the land and building portion. In Scenario 2, as CCA of $50,000 was claimed over the years and UCC for the building is $350,000, recapture also needs to be reported. CCA that has been claimed in previous years will be recaptured as the building was over-depreciated relative to the ultimate sale proceeds received. On the off chance a building is sold for less than its UCC, a terminal loss provides for a deduction as it has been under-depreciated relative to its ultimate sale proceeds.
Recapture is considered taxable income in the year of disposition, as any CCA claimed in previous years was a tax deduction at 100%. Recapture does not benefit from beneficial tax treatment such as a 50% inclusion rate for capital gains.
One key downside of recapture is that the entire amount is added back to income in one year, which may result in more tax being paid than the cumulative tax deductions received when the CCA deductions were claimed over several tax years, especially for individual taxpayers who are subject to a marginal tax rate system in Canada.
When considering whether to claim CCA annually against net rental income, one may think that the associated tax savings are always beneficial, but are they?
Would forgoing an annual tax deduction be advantageous in certain situations?
Our example:
Over the last five years, the individual taxpayer’s net rental income and CCA of $10,000 each year was subject to 40% tax – their marginal tax rate. The $10,000 CCA resulted in $4,000 of tax savings annually, or $20,000 over the five years the rental property was owned.
In 2025, due to the sale of the rental property which generated a $250,000 capital gain (land and building) and $50,000 in recapture being reported, the individual taxpayer’s marginal tax rate is now 50%. The $50,000 in recapture will trigger $25,000 in taxes payable. Claiming CCA and triggering recapture in this instance has cost the individual taxpayer $5,000.
In closing
When considering the purchase of a rental property, or converting a principal residence to a rental property, there are many tax considerations, including but not limited to those highlighted above. Given the appreciation in value of Canadian real estate having a long term perspective is key. If you have questions about the taxation of Canadian rental properties, please contact your Raymond James Advisor, to discuss further.
This has been prepared by the Total Wealth Solutions Group of Raymond James Ltd. (RJL). Statistics and factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities nor is it meant to replace legal, accounting, taxation or other professional advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The information is furnished on the basis and understanding that RJL is to be under no liability whatsoever in respect thereof. This is intended for distribution only in those jurisdictions where RJL and the author are registered. Securities-related products and services are offered through Raymond James Ltd., Member - Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd. (“RJFP”), a subsidiary of Raymond James Ltd., which is not a Member - Canadian Investor Protection Fund. When providing life insurance products, Financial Advisors are acting as Insurance Representatives of RJFP. Raymond James Ltd.’s trust services are offered by Solus Trust Company (“STC”). STC is an affiliate of Raymond James Ltd. and provides trust services across Canada. STC is not a Member of the Canadian Investor Protection Fund. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
