Capital Cost Allowance (CCA) is a deductible tax amount based on the depreciating value of the building (not including land) you acquired to produce income. The amount which you can depreciate on any given property is based on the class of property in question and the remaining amount of Undepreciated Capital Cost (UCC).
Capital Cost Allowance is NOT a means to avoid paying tax, rather a deferral of paying tax when CCA Recapture is realized upon the sale of a property.
What is not eligible for CCA?
Land, parking, driveway and any property that was not acquired for the purpose of gaining or producing income are not eligible to claim CCA deductions.
Should I be claiming CCA?
Unlike buying a car, you expect your home to go up in value and sell for higher than your final Undepreciated Capital Cost (UCC). When the time comes to sell your property you will need to keep in mind that CCA must be paid at your current personal or company tax rate. The following should be considering before claiming CCA
- Will my personal tax rate increase by the time i sell my property?
- Will there be government changes to tax which increase my tax rate?
- If property is held in a corporation, will there be other tax changes which will impact the final CCA taxable obligation.
Best use case for CCA:
CCA success is seen when property is held for an extended period of time with no immediate plans to re-sell. An example of this would be buying 1 or more properties for long term capital growth and ongoing rental income.
Example of CCA:
If you purchased a Class 1 property for $300,000 with a building value of $250,000, the maximum CCA you can claim is 4% per year based on the Undepreciated Capital Cost (UCC). If after 3 years you claimed the maximum CCA, the total amount of recapture would be ~$28,800. Because CCA is a deferral tax, this now means you are liable to pay tax on the $28,000 at your current tax rate which could be higher or lower than if you had to pay it 3 years prior.
Other Rules of CCA:
- You cannot claim CCA to create or increase a rental loss. If your NET rental income before CCA is $2,500 you can only claim up to $2,500 of CCA for that year.
- You cannot claim CCA for years in which you have a NET rental loss
- In the first year of purchase, you can only claim up to 50% of the total Undepreciated Capital Cost (UCC)
- There are different classes of property, each have a different rate of CCA (usually it's 4% per year)
- CCA does not include any Capital Gains tax payable upon the deposition of a property.