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  • 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.

    Before claiming CCA, please consult with an accountant. Ryan Fujii, CPA, CGA can help you!

    CCA Taxes Deductible Expense Rental Building

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Author : Ryan Fujii
Ryan Fujii, CGA, provides professional accounting/taxation services to individuals and business owners locally and internationally.
 
Member of the Certified General Accountants Association of British Columbia and Canada Member of the Association of Fellow Chartered Certified Accountants
 
The J.M.Macbeth Award of merit from the Certified General Accountants Association of British Columbia
 
Active board member of the CGA Vancouver Chapter: Social chair, past Educational chair and past Professional Development chair