Understanding Capital Cost Allowance
Author:
Ryan Fujii
Date: April 1, 2016
What is Capital Cost Allowance?
Capital Cost Allowance could best be described a the expense that the Income Tax Act
permits a taxpayer to deduct from income when determining taxable
income. If you acquire a rental building, it is the acquisition cost attributed to depreciable property such as,
buildings, furniture, or equipment. While you
cannot deduct the price of the property when calculating your net rental property income, you
can deduct the cost of depreciable property over a period of several
years. This deduction
is called a Capital Cost Allowance or CCA.
Below are some of the key factors to keep in mind when calculating your CCA:
Limits on CCA
CCA can only be used to reduce rental income to zero. Therefore,
you cannot claim CCA to create a rental loss.
The Half-Year Rule
In the year you acquire rental property, you can usually claim CCA
only on one-half of your net additions to a class. This is called the
"Half-Year rule"
Available for use
You can claim CCA on a rental property only when it becomes
available for use.
How much CCA can I claim?
The rate of Capital Cost Allowance, you are permitted to deduct, depends on the type of rental property you own and the
date you acquired it. Depreciable property is separated into different classes. Each class generally has a corresponding rate. The maximum rates are specified in the Income Tax Act.
Land: Not a depreciable property. Therefore, you cannot claim the CCA on land.
Buildings: a rental building may belong to class 1-4%, 3- 5%,6-
10%, 31-5% or 32-10%, depending on what the building is made of
and the date you acquire it.
Furniture: Class 8 - 20%
For example: Last year, you acquired a rental building for
$300,000. No CCA was claimed in that year. This year on your personal
income tax return, you can claim the maximum amount of CCA $12,000
$300,000 x 4% = $12,000.
Should I claim CCA on rental property?
When the property is sold at an amount greater than the original
purchase price, there will be a gain on the disposition of the
property. The amount of the CCA that has been claimed over the years
must be claimed as income in the year of the disposition. Depending
on the length and amount of the CCA claimed, this can create large
taxable income in the year of the disposition.
Without proper planning, you may end up owing significant taxes on a
rental property, if you do choose to sell it in the future.
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Before claiming CCA, please consult with an accountant. Ryan Fujii, CPA, CGA can
help you!
CCA Taxes Deductible Expense Rental Building
