How CCA recapture works on rental property, when it hits, and how to plan around it.
In Canada, rental property depreciation is handled through the Capital Cost Allowance (CCA) system. While CCA lets landlords deduct a percentage of the building's value each year, there's a deferred cost: when the property is sold, the CRA "recaptures" all CCA claimed — and taxes it at 100% as ordinary income. This guide explains how recapture works and what landlords should know.
Most rental buildings fall under Class 1 at 4% declining balance. Each year you own the rental, you can claim up to 4% of the undepreciated capital cost (UCC) as a deduction against rental income. This reduces your taxable rental income now — but shrinks the UCC balance, setting up recapture later.
| Year | Opening UCC | CCA Claimed (4%) | Closing UCC |
|---|---|---|---|
| 1 (half-year rule) | $400,000 | $8,000 | $392,000 |
| 2 | $392,000 | $15,680 | $376,320 |
| 3 | $376,320 | $15,053 | $361,267 |
| 5 | $347,192 | $13,888 | $333,304 |
| 10 | $288,491 | $11,540 | $276,951 |
Recapture occurs when you sell the rental property for more than the remaining UCC. The CRA recaptures the difference — up to the amount of CCA you originally claimed — and taxes it as ordinary income at your full marginal rate.
This is the most important distinction landlords must understand:
| Tax Component | Inclusion Rate | Effective Rate at 46% Marginal |
|---|---|---|
| Capital gain on property | 50% | ~23% |
| CCA recapture | 100% | ~46% |
If you sell the rental property for less than the UCC, you have a terminal loss — the UCC exceeds the sale proceeds. A terminal loss is 100% deductible against any income. Terminal losses on real estate are uncommon given Canada's long-term price appreciation trend, but can occur in distressed markets or with property-specific problems.
Appliances, furnishings, and equipment inside the rental property are in separate CCA classes (typically Class 8 at 20% or Class 10 at 30%). These have:
Many landlords choose to claim CCA on contents but not on the building itself — capturing some depreciation benefit while avoiding the large recapture risk on the appreciating building.
The simplest approach: simply don't claim CCA on the Class 1 building. You give up annual deductions but avoid recapture entirely on sale. For most landlords in appreciating markets, this is the cleanest strategy.
If you do have recapture, selling in a year when your other income is low (retirement year, career transition, sabbatical) reduces the marginal rate applied to the recapture amount.
CCA is discretionary — you don't have to claim the maximum each year. Claim it only in years when you need to reduce income, and skip it when you don't. The UCC carries forward indefinitely.
Some investors hold rental properties in a corporation. The corporate tax rate on passive income is high, but recapture timing can potentially be managed differently. This is complex and requires professional advice.
CCA recapture is reported on your T776 (Statement of Real Estate Rentals) in the year of sale, on the CCA schedule. The recapture amount flows through to your T1 as rental income. The capital gain on the property is separately reported on Schedule 3.
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Get KOHO Free — Use Code 45ET55JSYARental property depreciation through CCA provides real tax savings each year — but creates a deferred liability that comes due on sale at 100% ordinary income rates. For most Canadian landlords in appreciating markets, the math often favours skipping CCA on the building and focusing deductions on current expenses and property contents. Run the numbers with your accountant before deciding on your CCA strategy.