Rental Property Depreciation: Pros and Cons of Claiming CCA – A Complete Guide by a Montreal CPA Firm Near You

Introduction

Capital Cost Allowance (CCA), commonly known as depreciation, is one of the most misunderstood deductions available to Canadian landlords. While CCA can significantly reduce taxable rental income today, it can also create a large tax bill later when you sell the property due to recapture. Many rental property owners claim CCA without understanding the long-term consequences, including the impact on the adjusted cost base (ACB), principal residence rules, and multi-year tax planning. This guide explains exactly how CCA works, when to use it, when to avoid it, and how to make the best decision for your rental property.

Legal and Regulatory Framework

CCA is governed by the Income Tax Act and reported on Form T776 (Statement of Real Estate Rentals). Buildings are generally depreciated using the declining balance method at 4% (Class 1) or higher for certain property types. Appliances, furniture, and equipment belong to separate CCA classes (typically Class 8 at 20%). Land is not depreciable. CCA is optional—you are never required to claim it. However, any CCA claimed reduces the UCC (undepreciated capital cost). When the property is sold, any amount previously claimed may trigger recapture, which is fully taxable as ordinary income.

Key Court Decisions

In Bruneau v. Québec, improper allocation of personal and rental portions caused partial denial of CCA. In Cassidy v. Canada, CRA successfully reclassified repairs as capital improvements, forcing the taxpayer to depreciate them instead of claiming immediate deductions. In Boisvert v. Canada, the court ruled that rental properties used partly for personal purposes must apply CCA only to the rental portion, reinforcing strict allocation rules. In Mallette v. Canada, the court confirmed that recapture applies even if the taxpayer did not intend to sell the property. These cases show that CRA and courts are strict about CCA compliance.

Why CCA Is a Double-Edged Sword

CCA can reduce your taxable rental profit, sometimes lowering your tax bracket. However, claiming CCA also triggers risks: future recapture when the property is sold, reduction or loss of the principal residence exemption if claimed on a personal-use property, increased taxable income when disposing of the building, and potential GST/QST implications for certain property types. CCA is most beneficial for long-term rental properties where sale is far in the future—but may be harmful for properties you plan to sell soon.

When CCA Can Be a Good Idea

1. Long-Term Hold Properties

If you plan to keep the property for many years, CCA can reduce taxable rental income in the short term and create valuable tax deferral.

2. Negative-Cash-Flow Rentals

CCA can help soften the tax burden on properties with high expenses or mortgage interest during early years.

3. Fully Rental Multi-Unit Properties

When there is no personal use, CCA is cleaner and less risky.

4. Buildings with Slowly Appreciating Value

Where recapture risk is lower, CCA provides meaningful annual deductions.

When You Should Avoid Claiming CCA

1. If the Property Was Ever a Principal Residence

Claiming CCA on any portion of your home permanently eliminates the principal residence exemption on that portion.

2. If You Plan to Sell in the Near Term

Recapture can create a large tax bill that erases all benefits of CCA claimed.

3. If the Property Is Rapidly Appreciating

High appreciation means high recapture tax later.

4. Airbnb or Short-Term Rental Situations

CCA may complicate GST/HST rules and principal residence considerations.

5. Mixed-Use Properties

If part of the home is for personal use and part for rental, CCA can create complicated allocations and future tax issues.

Understanding Recapture

When a property sells for more than its UCC, the difference is added back as recaptured CCA, taxable at full marginal rates. Recapture is not a capital gain—it is ordinary income. After recapture, any remaining gain is taxed as capital gains. For many landlords, recapture is the primary reason to avoid claiming CCA unless tax deferral is strategically beneficial.

What You CAN Claim Instead of CCA

Landlords may deduct mortgage interest, property taxes, condo fees, utilities, repairs, insurance, advertising, management fees, professional fees, travel related to property management, and small repairs. Many taxpayers mistakenly claim CCA without first maximizing safer deductions.

Mackisen Strategy

At Mackisen CPA Montreal, we analyze each rental property individually to determine whether CCA is strategically beneficial. We examine appreciation trends, long-term plans, rental vs personal use, potential for recapture, family tax planning, and principal residence interactions. We calculate best-case and worst-case tax scenarios, prepare T776 filings, defend CCA claims during CRA audits, and create long-term property tax strategies to minimize future liabilities.

Real Client Experience

A landlord who claimed CCA for years faced a surprise recapture bill upon sale; we restructured capital improvements to reduce taxable recapture. A duplex owner avoided losing the principal residence exemption when we advised against claiming CCA on the owner-occupied portion. A condo investor used CCA strategically to offset early negative cash flow without jeopardizing long-term plans. An Airbnb host avoided CRA reassessment after we recalculated allocations between capital improvements and repairs.

Common Questions

Can I reverse CCA once claimed? No—CCA permanently affects future taxes. Does claiming CCA reduce my capital gain? No—it increases recapture instead. Can I claim CCA on land? Never. Should I claim CCA every year? No—CCA is optional and should be evaluated annually. Does CCA affect GST/HST? Potentially, for short-term rentals.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps landlords make smart, strategic decisions about CCA. Whether you own one rental unit or multiple properties, we protect your long-term wealth by ensuring every tax move—CCA or otherwise—is fully optimized, compliant, and audit-proof.