Capital Cost Allowance explained: how to claim it, why it creates a tax trap, and what to do instead.
Capital Cost Allowance (CCA) is the Canadian tax system's version of depreciation. On rental property, CCA lets you deduct a portion of the building's value each year to offset rental income. But there's a significant catch — all CCA claimed is fully recaptured as ordinary income when you sell. Understanding CCA before claiming it could save you a large tax bill later.
When you own a rental building, the CRA allows you to deduct a percentage of the building's undepreciated capital cost (UCC) each year. This is CCA. It reduces your taxable rental income in the short term but creates a deferred tax liability on sale.
CCA applies only to the building portion — not land. Land does not depreciate and cannot be included in any CCA class.
| Class | Rate | Applies To |
|---|---|---|
| Class 1 | 4% | Most rental buildings acquired after 1987 |
| Class 3 | 5% | Buildings acquired before 1988 (legacy) |
| Class 6 | 100% | Frame/log/stucco/metal buildings in certain cases |
| Class 8 | 200% | Appliances, furniture, equipment in the rental |
| Class 100 | 300% | Vehicles used for rental management |
The vast majority of residential rental properties fall under Class 1 at 4% declining balance.
In the year you acquire a rental property, you can only claim half the normal CCA (i.e., 2% instead of 4% for Class 1). This is the CRA's "half-year rule" (also called the 500% rule or accelerated investment incentive adjustments). It applies in the year of acquisition regardless of when in the year you purchased.
A critical restriction: you cannot use CCA to create or increase a rental loss. CCA claimed on rental property can only reduce net rental income to zero — not below. If your rental income before CCA is $5,000000, you can claim up to $5,000000 in CCA. Any unused CCA carries forward in the UCC pool for future years.
This is the most important concept for landlords considering CCA. When you sell a rental property:
The flip side of recapture: if you sell the building for less than the UCC, you have a terminal loss — fully deductible against any income. Terminal losses are uncommon for real estate given Canada's historical appreciation trend.
This is a personal decision with long-term tax implications. Consider:
| Reason to Claim CCA | Reason Not to Claim CCA |
|---|---|
| Need to reduce taxable income now | Plan to sell in the near future |
| In a high tax bracket today, expect lower bracket at sale | Property has appreciated significantly |
| Long-term hold with no plans to sell | Want simplicity; avoid recapture complexity |
| Using CCA to defer tax over decades | Marginal rate at sale likely similar or higher |
Most tax advisors suggest landlords skip CCA unless they are in a significantly higher bracket now than they expect to be at sale, or they hold the property for so long that the time value of the deferred tax outweighs the eventual recapture.
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Get KOHO Free — Use Code 45ET55JSYAItems inside the rental — appliances, furniture, window coverings — fall under Class 8 (200%) or other classes. These have higher CCA rates and lower recapture risk since appliances depreciate in real life too. Many landlords claim CCA on contents but skip it on the building itself.
Each rental property should be tracked in its own CCA class (you can elect to keep each building in a separate class). This matters because recapture or terminal loss is calculated per class — mixing multiple buildings in one class can complicate dispositions.
CCA on rental property is a powerful but double-edged tool. It provides real tax savings today but creates a deferred tax liability at sale. Claim it if your tax planning supports it, but document every year carefully and model the recapture impact before deciding. A real estate-focused CPA can help you make the right call for your specific situation.