What tax issues arise with capital cost allowance related to real estate?
Capital cost allowance (CCA) is the tax term in Canada for the deduction of amortization on capital assets. There are separate classes of CCA for property, plant and equipment and different rates that apply to each class. There are some specific rules for claiming capital cost allowance related to real estate.
Once construction is complete, a building can be sold as inventory and earn business income, used to earn property income, or used to operate an active business. If the building is not being sold, then it will generally become depreciable property for the corporation. In order to be classified as depreciable property, the building must meet the following conditions:
- It must not be included as inventory
- It must be available for use
- It cannot include land
- It must be acquired for purpose of gaining or producing income
A building becomes available for use earlier of when construction of the building becomes complete or when substantially all of the building (90% of more) is used by the taxpayer for the intended purpose.
For tax purposes, Class 1 includes most buildings acquired after 1987 and has a CCA rate of 4%. If the non-residential building was acquired after March 18, 2007 and used in Canada to manufacture or process goods for sale or lease, it is eligible for additional allowance of 6% for a total of 10%. The CCA rate for other non-residential buildings includes an additional allowance of 2% for a total of 6%. To be eligible for the additional allowances, you must elect to put the building in a separate class. A general rule is that rental properties with a capital cost of $50,000 must be entered into a separate class for CCA.
A taxpayer is not eligible to claim CCA on a rental property where it would increase the loss. However, once all other deductible costs are claimed, you can still claim enough CCA to bring net income to zero for the rental property. All property income and expenses from various rental properties are aggregated together to determine if any CCA can be claimed. For example, if one rental property has a net income of $2,000 and a second rental property has a loss of $1,000 then the combined net income is $1,000 and only $1,000 of CCA can be claimed in total.
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