Should you apply for a capital cost grant for a rental property?

There are related tax concepts called Undepreciated Capital Cost (UCC) and Capital Cost Allowance (CCA) which are essential to grasp.

What is UCC?

The Canada Revenue Agency (CRA) defines the capital cost of an asset simply as “what you pay for it. Capital cost also includes items such as shipping costs, the GST and PST, or the HST.”

In the case of a rental property, this may increasingly also include acquisition costs similar to legal fees or property transfer tax.

Undepreciated Cost of Capital (UCC) “is the balance of the cost of capital that remains for further depreciation at a given time. The amount of CCA you claim each year lowers the UCC of the property.”

What is CCA?

CCA is a depreciation you claim on an asset. In the case of a rental property, you possibly can claim CCA on a constructing but not on a bit of land. This depreciation is a percentage of the undepreciated capital cost that might be claimed as a tax deduction from rental income. It is normally as much as 2% within the 12 months the property is purchased (based on the half-year rule) and 4% on a declining balance in the next years.

When you make the most of CCA, the unamortized cost of capital reduces over time. You must track your UCC yearly.

In the case of a condominium, a lot of the purchase price could also be CCA eligible since the property value is usually low. For a property on a big piece of land, you could only give you the option to say CCA for a portion of the acquisition price. When purchasing a rental property, you will need to divide the acquisition price between the land and the constructing.

Knowledgeable appraisal could be the most reliable approach to determining proper allocation, but an appraisal isn’t mandatory for tax purposes. A taxpayer could make an inexpensive estimate.

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Why claim CCA?

Claiming CCA reduces your net rental income and due to this fact your tax liabilities. Depending in your personal income and country of residence, this may prevent between around 20% and 50% in taxes.

For a business, the tax savings from CCA are generally around 50%.

How much CCA do you have to claim?

You can only claim CCA as much as the purpose where your net rental income is zero. You cannot use a capital cost allowance to create or increase a net rental loss.

Therefore, there’s a maximum amount of CCA that might be claimed, but this can’t be determined until you prepare your tax return. The CCA limit can change from 12 months to 12 months as rental income and expenses rise and fall.

Spouses who own a rental property together can claim different CCA amounts.

If you own a rental property in a business, it is best to generally consider claiming CCA. If your income is comparatively high, it is normally helpful to also apply for CCA. If your income is comparatively low, it is advisable to think twice – and here’s why.

Calculation of recapture

If you sell a rental property in the long run, you’ll need to find out the entire capital allowance that has been claimed on the property previously. This prior CCA is claimed as a “recapture” and is taken into account taxable income within the 12 months of sale.

If you will have claimed quite a lot of CCA and owned a rental property for a few years, this recapture can lead to a big tax impact. For this reason, many individuals are hesitant to even use CCA.