🏚️ The "Free Money" Illusion
You generated $20,000 in rental income this year. Naturally, you want to minimize the tax bite. So, you claim Capital Cost Allowance (CCA)—depreciation on the building—to drive your taxable rental income down to zero. A smart financial move? Absolutely not. You have effectively signed a deal with the devil. When you sell the property in 10 years, the Canada Revenue Agency (CRA) will come for that money, and they will reclaim it at a significantly higher tax rate.
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| Landlords Beware! |
CCA allows you to deduct a percentage (typically 4% for Class 1 buildings) of your property's building cost each year. It successfully lowers your taxes today.
But here lies the trap: Real estate in Canada generally appreciates (gains value); it does not depreciate like a used car. When you eventually sell an asset for more than its depreciated value, you trigger a tax event known as "Recapture."
Capital Gains vs. Recapture
This is the math that bankrupts unsuspecting landlords. Not all income is created equal.
The Trap Explained: By claiming CCA, you are effectively converting what would have been a Capital Gain (taxed at ~26%) into Regular Income (taxed at ~53%). You are voluntarily deferring tax today only to pay double the rate in the future.
When Should You Claim CCA?
Is CCA always a mistake? Not always, but for residential rental properties, the math rarely works in your favor.
✅ Only Claim CCA If:
• You never plan to sell the property (generational hold strategy).
• You anticipate your marginal tax rate will be significantly lower in the year you sell (unlikely, as the sale itself usually spikes your bracket).
• The asset genuinely loses value over time (e.g., equipment, furniture, or automobiles—NOT real estate in major Canadian markets).
Chief Editor’s Verdict
Saving $2,000 in taxes today is not worth triggering a $20,000 tax bill when you exit. The short-term cash flow benefit pales in comparison to the long-term tax liability.
Unless you have a specific, calculated strategy designed by a CPA, do not claim CCA on your residential rental property. Treat the rental income as fully taxable now, and preserve the lower capital gains tax treatment for your future windfall.
The information provided in this article is for educational purposes only and does not constitute professional tax or accounting advice. Canadian tax laws (Income Tax Act) are complex and subject to change. The Capital Gains inclusion rate rules (50% vs 66.7%) mentioned reflect the 2026 tax environment. Every taxpayer's situation is unique. Always consult with a Chartered Professional Accountant (CPA) regarding your specific rental portfolio before filing your taxes.
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