What is capital cost allowance on a rental property?

Capital cost allowance (CCA) is the tax term for depreciation. It allows you to deduct a portion of the capital cost of your rental property building and equipment each year, reflecting its wear and tear. You can only claim CCA on the building — not the land, which does not depreciate. CCA is optional; you choose how much to claim each year up to the maximum.

What CCA class and rate applies to a residential rental building?

Most residential rental buildings fall into Class 1 at a 4% declining balance rate. This means in year one you deduct 4% of the building value (applying the half-year rule, you only claim 2%), and in subsequent years you deduct 4% of the remaining undepreciated capital cost (UCC). A $300,000 building depreciates very slowly at this rate — less than $6,000 in year one.

Can CCA create a rental loss?

No. CRA does not allow CCA to create or increase a rental loss. If your rental income minus all other expenses equals $0, you cannot claim any CCA that year. If income after other expenses is $3,000, you can only claim up to $3,000 in CCA. This is the "rental income restriction" on CCA.

What is CCA recapture and when does it happen?

When you sell a rental property for more than its undepreciated capital cost (UCC), the excess is "recaptured" and added to your income as ordinary income — not as a capital gain. Recapture is taxed at your full marginal rate with no 50% inclusion. This is the primary risk of claiming CCA — every dollar claimed now may create a taxable recapture dollar on sale.

Should I claim CCA on my rental property?

It depends. CCA defers tax today but creates recapture risk on sale. It is most beneficial when: your marginal rate is high now and will be lower at sale, you need CCA to reduce taxable rental income, or you are planning to hold the property long-term and recapture is a distant concern. For many long-term landlords, deferral value is modest given recapture certainty on sale.

Can I claim CCA on appliances in my rental property?

Yes. Appliances and equipment in a rental property typically fall into Class 8 at 20% declining balance. Unlike the building, appliances depreciate faster for tax purposes. A $5,000 fridge would generate a $500 CCA deduction in year one (half-year rule: 10%), then $900 in year two on the $4,500 balance, and so on. Again, the no-loss rule still applies.

CCA on Rental Property in Canada: How Capital Cost Allowance Works

Short Answer

CCA is a tax deferral tool for rental property owners — it reduces taxable income today but creates recapture on sale. Understanding the rates, the no-loss restriction, and the recapture mechanics is essential before deciding how much CCA to claim each year.

How CCA Works: The Declining Balance Method

CCA is calculated on the undepreciated capital cost (UCC) — not the original cost — each year:

Year	Opening UCC	CCA rate	CCA deducted	Closing UCC
1 (half-year)	$300,000	4% × 50% = 2%	$6,000	$294,000
2	$294,000	4%	$11,760	$282,240
3	$282,240	4%	$11,290	$270,950
5	~$261,000	4%	~$10,440	~$250,560
10	~$222,000	4%	~$8,880	~$213,000

At 4%, a $300,000 building never fully depreciates within a reasonable holding period. After 20 years, UCC is still approximately $130,000.

CCA Classes for Rental Property

Asset type	CCA class	Rate	Half-year rule?
Residential building (brick, concrete)	Class 1	4%	Yes
Wood-frame residential building	Class 6	10%	Yes
Appliances (fridge, stove, dishwasher)	Class 8	20%	Yes
Furniture, blinds, curtains	Class 8	20%	Yes
Vehicle used for rental management	Class 10	30%	Yes
Small tools under $500	Class 12	100%	Yes (50% in year 1)
Paving, fencing	Class 8	20%	Yes
Heat pumps (certain energy-efficient)	Class 43 or 53	Accelerated rates	Yes

Land is never depreciable and never included in the CCA schedule.

The Half-Year Rule

In the year you acquire a depreciable property, you can only claim half the normal CCA:

Normal rate	Year 1 effective rate
4%	2%
20%	10%
30%	15%

This applies regardless of when during the year you acquired the asset (January vs December = same half-year deduction).

The Rental Income Restriction: No Loss Rule

This is the most misunderstood aspect of rental CCA:

Scenario	CCA allowed?
Net income before CCA = $8,000	Up to $8,000 CCA
Net income before CCA = $3,000	Up to $3,000 CCA
Net income before CCA = $0	No CCA
Net income before CCA = ($2,000 loss)	No CCA

Result: CCA cannot reduce your rental income below zero. Any CCA not claimed this year is not lost — the UCC simply remains at a higher level for next year and future CCA potential carries forward.

Allocating the Purchase Price Between Land and Building

CCA is only claimable on the building, not land. You must allocate the purchase price:

Allocation method	Options
Municipal property assessment	Use the land vs building % from the assessment for the acquisition year
Appraisal	A formal appraisal specifying land vs building value
Reasonable estimate	For lower-value properties, a reasonable estimate documented in your records

If you paid $600,000 for a property assessed 35% land / 65% building:

Land: $210,000 (no CCA)
Building: $390,000 (enters CCA schedule at 4%)

CCA Recapture: The Other Side of the Coin

Every dollar of CCA claimed reduces UCC. When you sell:

Sale scenario	Tax result
Sale price < UCC	Terminal loss — deductible against other income
Sale price = UCC	No recapture or terminal loss
Sale price > UCC but < original cost	Recapture — UCC proceeds taxed as income
Sale price > original capital cost	Recapture (up to original cost) + capital gain (above original cost)

Example:

Building value at purchase: $400,000
CCA claimed over 12 years: $80,000
UCC at sale: $320,000
Building sold for: $450,000
Recapture: $450,000 − $320,000 = $130,000 (fully included in income)

If the sale also generated a capital gain on the land (proceeds > ACB for land), that is separate.

When CCA Makes Sense vs When It Doesn’t

Situation	CCA	Rationale
High marginal rate now, plan to retire before selling	Yes — defer to lower-rate retirement years	Tax rate differential makes deferral valuable
Same marginal rate now and at sale	Neutral at best	Recapture undoes the deduction
Plan to sell within 5 years	Generally no	Recapture likely exceeds deferral benefit
Low rental income — not needed to reduce income	No	Leave UCC intact; no deduction needed
Rental property in a corporation (CCPC)	Possibly yes — small biz rate differential is larger	Corp saves at 9%; shareholder inclusion on extracted dividend is different

Bottom Line

CCA on rental property is a deferral tool, not a permanent tax saving. The 4% annual Class 1 rate means building depreciation is slow, and every dollar claimed now typically comes back as recapture on sale. Claim CCA intentionally — when you need it to offset rental income or when a tax rate differential makes deferral genuinely valuable — rather than claiming it automatically each year.