Capital Cost Allowance and Rental Property: What You Need to Know
Unlike operating expenses, capital expenditures (such as the purchase price of a building, costs related to the purchase and expenses incurred to build additions or make substantial improvements) cannot be fully deducted in the year they are incurred. However, you can spread them out over time using capital cost allowance (CCA).
How does it work?
You can spread your capital expenditures over multiple years by deducting CCA every year. This is optional, so you can choose to deduct it or not each year, depending on your situation.
For rental property, CCA concerns only the building itself — for tax purposes, land is not depreciable. If you meet the requirements, deducting CCA will reduce your net rental income.
For rental property that is class 1 depreciable property, the maximum CCA for the year is 4% of the undepreciated capital cost (UCC) of that class at the end of the year. Generally speaking, the UCC is the capital cost of all the property in the class minus the total CCA deducted in previous years. However, the half-year rule, which limits the CCA on net acquisitions of property in the same class, may apply.
In recent years, a temporary accelerated investment incentive was created to accelerate CCA for certain property, including class 1 property. Under the incentive, you can increase the UCC by half (50%) the cost of your net acquisitions. The incentive also suspends the half-year rule. For more information, see the Capital Cost Allowance Guide (TPW-130.G-V).
Example – CCA on 100% rental property
You purchase a building in 2026 for a total cost of $800,000.
- Cost of the building: $480,000 (60%)
- Cost of the land (non-deductible): $320,000 (40%)
The building:
- is your only class 1 property
- is considered to have been put into use in 2026
- qualifies for the accelerated investment incentive
Calculating CCA on the building
The UCC used to calculate CCA is $720,000 (the cost of the building [$480,000] + the accelerated investment incentive amount [$480,000 × 50%]).
The maximum CCA for the year is $28,800 ($720,000 × 4%).
At the end of the year the building was acquired, the UCC of the class is $451,200 ($480,000 – $28,800).
The next year, the maximum CCA will be $18,048 ($451,200 x 4%). At the end of that year, the UCC of the class will be $433,152 ($451,200 – $18,048).
The calculations continue in this way year after year if there is no change in class.
Sale of rental property
If you sell rental property for more than you paid for it, you realize a capital gain, which you will have to report in your income tax return.
If the sale price is more than the building’s UCC, you may have to add CCA recapture to your rental income for the year of the sale. If the sale price is less than the building’s UCC, the difference may be considered a terminal loss.
Special rules
- In general, you cannot claim CCA to create or increase a rental loss.
- If you use property both for personal use and to earn rental income, you can only claim CCA for the part of the capital cost attributable to the part you rent.
Make sure to keep in mind the rules for the change in use of property.
Conclusion
CCA can be advantageous, but it is only one part of a sound overall planning strategy. Before claiming it, it is important to consider your tax situation, your financial goals and how long you plan to own the property.
A tax professional can help you decide whether CCA is right for you and understand how to make the most of it.
References
For information about rental income, see the following:
- guide IN-100-V, Individuals and rental income
- form TP-128-V, Income and Expenses Respecting the Rental of Immovable Property
To learn more about CCA, the accelerated investment incentive, CCA recapture and terminal losses, see the Capital Cost Allowance Guide (TPW-130.G-V).
For information about capital gains and changes in use of property, see guide IN-120-V, Capital Gains and Losses.
Revenu Québec is there to help
Revenu Québec offers a French-only online information session entitled Les propriétaires d’immeubles locatifs et la fiscalité. To take part, see the information under Impôt des citoyens at Séances d'information offertes à Revenu Québec.
This session is given throughout the year. Check the page regularly for dates and other topics that may interest you.
Upcoming dates:
Revenu Québec also offers free individual and personalized meetings where you can ask about your rights and obligations as a landlord. For more information and to find out how to sign up, click One-on-One Meetings.
More information is available under Landlord on Revenu Québec’s website.
