CCA on buildings, and the recapture bill at the sale

You can claim capital cost allowance — CCA, the tax system’s version of depreciation — on a rental building. You can never claim it on the land underneath. And when you sell the building for more than what is left of its cost in the tax pool, the excess comes back as income — up to every dollar you ever claimed. That recovery is called recapture, it is taxed in full rather than half, and it lands on top of the capital gain rather than instead of it.

CCA on a building is a deferral, not a discount. It moves tax out of the years you hold the property and into the year you sell it — and the year you sell is usually a year your income is already large.

The building depreciates slowly; the land never does

The first number that matters is not the rate. It is the split of the purchase price between land and building.

Land is not depreciable property. Hold it thirty years and its cost sits unchanged, earning no deduction on the way through. The building goes into a CCA class and is written down on a declining balance at a rate set by that class — a low one, because the tax system assumes a building lasts decades rather than years. The pool works exactly as it does for equipment; it just gives the cost back far more slowly.

Get the split wrong and everything downstream is wrong. Push more of the price onto the building and the annual claim improves while the recapture waiting at the end grows to match it. The allocation has to be reasonable and supported — an appraisal, the assessment split, a figure negotiated in the purchase agreement — because the CRA can revisit it at purchase and again at sale.

One structural point matters later. A rental building whose cost reaches a prescribed threshold generally sits in a class of its own rather than pooling with your other buildings, so recapture and terminal loss are computed building by building rather than across a portfolio.

Claiming it is a decision you make every year

CCA is permissive. You may claim the maximum, nothing, or any amount between, and what you skip is not lost: it stays in the undepreciated capital cost, the running balance of what the pool has left to give, and comes back in later years.

One restriction surprises owners more than the rate does. CCA on rental property generally cannot be used to create or increase a rental loss. If the rent, after mortgage interest, property tax, insurance and repairs, is barely positive, the claim is limited to the amount that brings rental income to nil — capped by the property’s own performance rather than by your appetite for a deduction.

What each side costs is plain enough. Claiming shelters rental income now, at whatever rate the corporation pays on it, and enlarges the recapture at the end. Banking it keeps the pool full and the recapture small. A deferral is worth something, but one you unwind in eighteen months, in a year that already holds a large gain, is worth less than nothing.

Recapture is the line nobody budgets for

Sell the building and the proceeds attributable to it come out of the class. Where those proceeds exceed the undepreciated capital cost, the excess — up to the building’s original cost — is added to the corporation’s income for the year of the sale. In full. There is no half-inclusion on recapture and no reserve to spread it over.

Nothing is being clawed back unfairly — you told the tax system the building was losing value, the market disagreed, and the corporation settles the difference. The rate applied to that income turns on how the rental operation is characterized, active business or property-holding, which is worth settling before closing rather than at the return.

Keep one detail in view: recapture adds nothing to the capital dividend account. Those dollars are fully taxable going in and generate nothing that can come back out to you tax-free.

The downside version is a terminal loss

The rule runs both ways. Where the building is the last property in its class and proceeds fall short of the undepreciated capital cost, the shortfall is a terminal loss, deductible in full. The symmetry has one exception that catches real estate specifically: a rule can reallocate proceeds between land and building where the building sells at a terminal loss and the land at a gain, on the reasoning that the two were priced together. It is the most common way a terminal loss an owner has already spent turns out not to exist.

The capital gain sits on top, and half of it can come out tax-free

Where proceeds exceed original cost, the excess is a capital gain, computed separately on the land and on the building. The inclusion rate is 50%: half the gain is taxable. Inside a corporation that taxable half is investment income, taxed at a high rate, part of which is refundable when dividends are paid.

The other half is the good news. It is not taxed, and it generally adds to the capital dividend account — the notional account a corporation can pay out to Canadian-resident shareholders tax-free by election. The CDA has its own guide; what matters here is that a property sale usually creates a balance, that the balance is a position at a moment in time rather than a permanent entitlement, and that the election is filed before the dividend is paid.

The lifetime capital gains exemption is generally no help here. It applies to a sale of shares in a qualifying corporation, not to a corporation’s sale of a property — and a corporation holding rental real estate generally fails the active-business tests it rests on.

A C$800,000 building, C$120,000 of CCA, and a sale above cost

Illustrative, round numbers, a December 31 year-end, one rental property in the corporation.

The corporation bought the property for C$1,000,000, allocating C$800,000 to the building and C$200,000 to the land. Over the years it held it, it claimed C$120,000 of CCA against rental income, so the pool is down to C$680,000. It sells for C$1,250,000 — C$950,000 on the building, C$300,000 on the land.

Three separate things happen:

• Recapture of C$120,000. The building’s proceeds exceed both the pool and the original cost, so the full C$800,000 comes out against a C$680,000 balance. The recaptured amount is exactly the CCA claimed, and all of it is income.
• A capital gain of C$150,000 on the building: C$950,000 against a C$800,000 cost. Half taxable.
• A capital gain of C$100,000 on the land: C$300,000 against C$200,000. Half taxable, and no recapture, because no CCA was ever claimed on it.

The corporation reports C$120,000 of recapture plus C$125,000 of taxable capital gain — half the combined C$250,000 gain — so C$245,000 of income out of a sale that made C$250,000. The other C$125,000 is the non-taxable half, and it generally lands in the capital dividend account.

Notice which dollars are the expensive ones. The recapture is taxed in full and contributes nothing to the CDA. The gain is taxed on half and sends the other half to an account that can reach you tax-free. Two very different qualities of money out of one closing — and the shelter taken in earlier years is what built the expensive pile.

The bill runs on the corporation’s ordinary schedule: the balance of tax generally due two months after year-end — three months for many CCPCs that claimed the small-business deduction, which a rental corporation may not be — and the T2, the corporation’s income tax return, six months after — June 30 on this December 31 year-end. The deadline table has the rest. A gain this size usually resets the following year’s instalments too.

What Cadence does

We set the land-and-building split when the property is bought, not when it is sold, and keep what supports it in the file so the numbers are still defensible years later. Each year we run the CCA claim as a decision — what it shelters now against what it adds to the recapture later, and whether the rental-loss restriction caps it anyway — instead of defaulting to the maximum. When a sale is coming we compute the three components before you sign: the recapture, the taxable gain, and what lands in the capital dividend account. The corporate return and your personal one are prepared in the same file, so the capital dividend election and the money actually reaching you are planned together. Investors and holding companies get that review inside the ongoing engagement, because a closing date is a bad time to be meeting an accountant.