Claiming CCA on rental property: Should you claim depreciation?

When it comes to claiming CCA on rental property, the decision is more complex than it first appears. As a real estate accountant, and real estate investor myself, I’m often asked if CCA is a smart way to reduce taxes. In this video, I explore why claiming CCA can sometimes be the better move—both in the short and long-term—and what you need to understand before making your decision. And, why claiming CCA on your rental property can actually mean gaining an interest-free loan from the government.

Video Transcript: Claiming CCA on rental property

Many real estate investors shy away from claiming CCA or capital cost allowance, or perhaps better known as depreciation, on the rental properties.

Now there are restrictions that may prevent you from claiming them, but often I find the reason someone will say no is that they are afraid of what I’ll call recapture.

Recapture is basically Revenue Canada’s way of providing taxes on previously claimed depreciation if the property is ultimately sold for a profit.

So if there has been a profitable transaction down the road, Revenue Canada says, hey, over the years we’ve allowed you this expense for depreciation. Now we’re going to unwind that because it turns out your property went up in value, not down. Which is fair.

Claiming CCA on rental property as an “interest-free loan”

Let me put it a different way though, for taxpayers, Revenue Canada is offering you an interest-free loan.

When you have money after selling the property, you have to repay that loan, repay those taxes you previously claimed. But in the interim period, you probably haven’t had as much cash flow and that deduction can work a lot harder for you, again, depending on your overall tax situation.

Using a corporation to build a reserve of depreciation

Further, give some thought to the benefit of using a corporation as compared to personal ownership. In a corporation, you can effectively, in most cases, not all, essentially build a reserve of depreciation that can be claimed in the future when there are more profits, or even the sale of a property.

Give it some thought.

I’m George Dube, saving the world from tax, one bow tie at a time®.

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Resources

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Remember – circumstances are unique! This information is summary in nature. Seek out advice from your tax advisor about your specific situation.