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CCA for Canadian Rental Properties: How the Class 1 Depreciation Deduction Works

Capital Cost Allowance (CCA) lets Canadian landlords deduct a portion of their property's building value each year. Here's how the Class 1 rate, half-year rule, and declining balance work.

CCA for Canadian Rental Properties: How the Class 1 Depreciation Deduction Works

Capital Cost Allowance (CCA) is the Canadian tax term for depreciation — the deduction that allows landlords to write off a portion of the building's cost over time. Unlike the US, where depreciation is mandatory and straight-line, Canadian CCA is optional and calculated on a declining balance. That optionality is both an advantage and a trap.

What Can Be Depreciated

Only the building value qualifies — not the land. Since a purchase includes both, you must reasonably allocate the purchase price between land and building. The CRA may challenge allocations that deviate significantly from municipal assessments.

Rental buildings fall under CCA Class 1 at a 4% declining balance rate.

How the Declining Balance Works

Unlike straight-line depreciation (same amount each year), the declining balance means you apply 4% to the undepreciated capital cost (UCC) each year. The deduction gets smaller over time.

Example: $500,000 building (land excluded)

| Year | Opening UCC | CCA (4%) | Closing UCC | |------|------------|----------|------------| | 1 | $500,000 | $10,000* | $490,000 | | 2 | $490,000 | $19,600 | $470,400 | | 3 | $470,400 | $18,816 | $451,584 |

*Year 1 uses the half-year rule — only 50% of the normal CCA is claimable in the year of acquisition.

The CCA Limit: You Cannot Create a Loss

CCA can reduce your rental income to zero, but you cannot use CCA to create a net rental loss. This is a critical constraint. If your rental net income (before CCA) is $8,000, you can claim at most $8,000 in CCA.

The Recapture Problem at Sale

When you sell the property, the CRA compares your proceeds (attributed to the building) to your remaining UCC. If proceeds exceed UCC, the difference is recaptured CCA — taxed at your full marginal rate, not at the 50% capital gains rate.

This is why claiming CCA is not automatically beneficial. You're essentially deferring tax, not eliminating it. The advantage is the time value of money — a deduction today is worth more than an equivalent tax payment in the future.

When CCA Makes Sense

  • You're in a high-income year and face a large tax bill
  • You plan to hold the property long-term and your future tax rate will be lower (e.g., in retirement)
  • You're in a corporate structure where the recapture can be managed differently
  • You're facing an operating loss and need CCA to offset other income (not allowed — see limit above)

Try the Calculator

→ CCA / Depreciation Calculator

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