Owning rental property provides not only income but also deductions you can claim at tax time. This includes rental expenses, such as homeowner’s insurance, property taxes, maintenance fees, advertising, mortgage interest, utility costs, and property management fees. You also may qualify for the capital cost allowance, or CCA, which is depreciation that can be claimed on your return. The Canada Revenue Agency (CRA) has specific requirements for claiming the CCA on rental property.


Key Takeaways

  1. Owning rental property generates income and allows for various tax deductions, including expenses such as homeowner’s insurance, property taxes, maintenance fees, advertising, mortgage interest, utility costs, and property management fees. Additionally, property owners may qualify for the capital cost allowance (CCA), which allows for depreciation claims on their tax returns.
  2. Depreciable rental property can have its capital costs written off, including purchase price, legal fees, and costs of equipment and furniture. The CCA is calculated using the “declining balance method,” where the allowance amount is based on previous claims subtracted from the property’s capital cost.
  3. For tax purposes, depreciable properties are categorized into various classes, each with specific deduction rates. Accurate classification is essential, as different classes apply to properties obtained in different periods.

Define your depreciable property

Depreciable properties are those that have been worn out from use over the years, such as automobiles and farm and business equipment. You can claim the CCA for depreciable rental property. This means you can write off the capital cost of the property including the purchase price, legal fees associated with the purchase of the property, and cost of equipment and furniture that comes with renting a building. Remember, land is considered separate from the building and cannot be depreciated.

If you rent out part of your principal residence, you should exercise caution before making a CCA claim for your home. “Because real estate values usually trend upward rather than downward, like an automobile’s, any depreciation taken may have to be included back into income after a sale is made,” says Lior Zehtser, partner and co-founder of ConnectCPA.

Figure depreciable rate by class

For tax purposes, depreciable properties are grouped into various classes. To figure out the CCA amount you can claim, you must first determine the rate that applies to the class. For example, a 4% deduction rate applies to depreciable property in class 1, which includes most buildings obtained after 1987. The same type of property can belong to a different class, so check each class carefully before categorizing it. For example, most buildings acquired before 1988 belong to class 3 or 6. The complete list of depreciable property classes is posted on the CRA’s website.

CCA calculation method

Your CCA is based on the type of rental property and when you obtained it. To determine the amount, you would likely use the “declining balance method.” In this case, your CCA amount is based on any allowance claimed in prior years subtracted from the capital cost of the property.

As you claim the CCA, in subsequent years your remaining balance declines. You can claim any amount of your allowance for the year—you do not have to take the full amount all at once. For example, you might want to hold off on claiming your CCA if you don’t owe any taxes for the year since taking the allowance lowers the amount you’re entitled to in upcoming years.

Selling a property

Selling the property may result in a “recapture” of your CCA. You would add this recaptured amount to your taxable income when preparing your tax return. Recapture may happen if upon selling the property the proceeds from the sale exceed the remaining undepreciated capital cost. Your undepreciated capital cost is the capital cost of all your depreciable property in the class subtracted from the allowance you claimed in prior years.

Alternatively, you might be allowed to take a “terminal loss” deduction from your income. Terminal loss is when you don’t have any depreciable property in the class at the end of the year, but you have an outstanding CCA amount that you have not claimed. “Upon sale, any profit you earned on the rental property over and above your initial cost will be treated as a capital gain. Capital gains are currently taxed at 50% of the gain, whereas recapture is 100% taxable,” says Lior Zehtser. Keep in mind that there is a proposal awaiting legislation that would increase the inclusion rate to 66.67% for capital gains of over $250,000.

Claiming CCA on full net additions

The half-year rule lets you claim 50% of CCA on net additions. Therefore, in the year you bought the property, you cannot claim the CCA on all your net additions in a given class. Instead, you would claim the allowance on only half of your net additions. For example, if you purchased a rental home for $20,000, your allowance would be based on $10,000 for the first year.

Taxes and rental losses

If your rental expenses exceed your gross rental income, you have incurred a loss. You may be able to deduct your rental loss from other sources of income, but you cannot use CCA to increase or produce a rental loss.

For example, you own 2 rental properties. The net income for 1 property is $3,000, while the other property yielded a loss of $5,000. This means you suffered a loss of $2,000. Because you cannot increase your net rental loss by claiming CCA, you cannot claim any CCA on your rental buildings or equipment.

Know the effects

There are pros and cons to claiming CCA. On the upside, the allowance lowers your taxable income, which ultimately reduces your tax liability. On the downside, when you sell the property all prior CCA claims are recaptured and treated as taxable income, which increases your tax liability. According to Lior Zehster, “The decision as to whether to take CCA should be discussed with a professional.”

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