All the Numbers

Capital cost allowance

From the All the Numbers wiki · Renting part of a home

The cost of a rental building is a capital expense: it is not deducted in the year it is paid. Capital cost allowance is the way the tax system lets that cost be written off over time against the rent. The write-off is optional, and the CRA allows any amount from nil up to the maximum each year.

The formula

Rental buildings acquired after 1987 go in Class 1, written off on a declining balance at 4% a year.[1] The balance is the undepreciated capital cost (UCC). Each year:

maximum claim = 4% × (opening UCC + first-year base on new additions)
closing UCC   = opening UCC + additions − claim
  • Land is not depreciable. The cost of the property is divided between land and building, and only the building is written off.
  • Separate classes. Each rental building that cost $50,000 or more must be kept in its own Class 1.[2]
  • First year. Under the half-year rule only half of the year's additions go into the base.[3] The accelerated investment incentive changes that for property acquired after 20 November 2018: the base is 1.5 times the additions for property available for use before 2024, one times the additions (the half-year rule is suspended) for 2024 to 2027, and the half-year rule returns for 2028 and later.[4] A proposal to bring back the 1.5 times base for property acquired from 2025 has not been enacted, so the engine does not use it.[5]
  • No loss from CCA. The claim is limited to the net rental income before CCA. It can bring rental income to nil, never below.[6]

Why a home with a suite usually avoids it

Claiming CCA on part of the home you live in ends the CRA's practice of leaving the whole home as a principal residence when the rental is minor. The rented part is then treated as sold when it started to earn rent; see change of use and renting part of your home. The write-off lowers the tax on the rent now, but it brings tax on the eventual sale.

When the property is sold

If the sale price of the building is more than the UCC left, the difference up to the original cost is recaptured: it is added to rental income for the year (not taxed as a capital gain). If it is less and no other property remains in the class, the shortfall is a terminal loss.[7]

When land and building are sold together, a terminal loss cannot be created by loading the price onto the land. The building's share of the price is treated as the greater of its market value and the lesser of its cost and its UCC, up to the total price, and the land's share is reduced to match.[8]

What the engine does and does not do

  • The engine can calculate the Class 1 claim, the first-year rule by the year the building becomes available for use, recapture and terminal loss, and the land and building division. A CCA claim needs the value of the land to be given.
  • The planner never asks for CCA, never claims it and never calculates recapture. A plan with a suite therefore shows no write-off against the rent and no recapture on a sale, and it assumes the principal-residence exemption still covers the whole home.
  • Other classes (pre-1988 buildings, furniture and appliances) are not applied.
  • The engine will not accept CCA on a property that is also designated as a principal residence for the same years, because the claim would void the elections described in change of use.

See also

  • Capital gains and the adjusted cost base · Selling an investment for more than its adjusted cost base is a capital gain, and half of it is added to taxable income in the year of the sale. Growth that has not been sold is not taxed.
  • Change of use · When part of a home starts to earn rent, tax law can treat that part as sold and bought back at market value. An election can postpone this for up to four years, and the cost of the property for a later write-off is set by a formula. The planner assumes the rental is minor, so none of this is applied.
  • Renting out a suite · Rent from part of your home is taxable income. The costs of the whole home are deductible only for the rented share, mortgage principal and land transfer tax are not deductible, and a loss offsets other income when the rental is run to earn money. A lender may count part of the rent when you apply.
  • Renting out part of your home · Suite income is taxable and its expenses are deductible on the rented portion, but renting can also limit the principal-residence exemption on the eventual sale. The planner assumes the rental use stays ancillary, so the whole gain on a sale stays exempt, and says it assumed so.
  • Self-employment income · A sole proprietor's net business income is taxed on the personal return, with nothing withheld during the year and both halves of CPP owed. The engine can model a simple sole proprietorship; the planner does not ask for one, so plans treat everyone as an employee.
  • Selling a home · A sale turns the home's projected market value into cash after selling costs of 5.8% and the mortgage payout. The gain on a principal residence is exempt from tax, apart from the part that was rented out when the exemption does not cover it.

References

  1. ↑Guide T4036 Rental Income — Chapter 4, Classes of depreciable property · CCA Class 1 (buildings acquired after 1987): declining-balance rate · 4% · effective 1988-01-01
  2. ↑Guide T4036 Rental Income — Chapter 4 · Each rental building costing at least this amount must be kept in its own Class 1 · $50,000 · effective 1972-01-01
  3. ↑Guide T4036 Rental Income — Chapter 4 · Half-year rule: CCA in the year of acquisition on only this share of net additions to the class · 50% · effective 1981-11-13
  4. ↑CRA — Accelerated investment incentive · Accelerated investment incentive (enacted): first-year CCA base multiplier on net additions, by year the property becomes available for use — before 2024: 1.5; 2024–2027: 1.0 (half-year rule suspended); 2028 and later: half-year rule (0.5). Acquired after 2018-11-20. · See the source · effective 2018-11-21
  5. ↑CRA — What's new for corporations · PROPOSED (2024 FES, restated Budget 2025): reinstate the 1.5× first-year enhancement for property acquired on or after 2025-01-01 and available for use before 2030, four-year phase-out after 2029. Not enacted; the engine uses cca.aiip.first-year until it is. · 150% · effective 2025-01-01
  6. ↑Guide T4036 Rental Income — Chapter 4 · CCA cannot create or increase a rental loss: the claim is capped at net rental income before CCA (Reg. 1100(11)) · effective 1972-01-01
  7. ↑Income Tax Act s.13 · Recapture: when the class UCC goes negative at year end after a disposition, the negative amount is income (rental income line 9947); terminal loss (20(16)) when positive UCC remains and no property is left in the class · effective 1972-01-01
  8. ↑Income Tax Act s.13 · When land and building are sold together and a terminal loss would arise, building proceeds are deemed the lesser of total proceeds and the greater of building FMV and the lesser of its capital cost and UCC; land proceeds reduced accordingly · effective 1972-01-01