Thanks for the great post on CCA. When you say in your Post 12 that “The one time you should never claim CCA is if you rent out a part of your home.” you are referring solely to claiming CCA for my home…correct? Claiming CCA for equipment and computers purchased (Class 8 & 45 respectively) will not affect my Principal Residence designation….correct?

Any help is appreciated.

MA

You can lose the tax-free status of your principal residence if you claim CCA on it. It sounds like this condo is your home, so you should not claim CCA.

It might be possible on specific “leasehold improvements”, if you can clearly idenditfy specific renovations just for your business, but otherwise, you should avoid CCA on your principal residence.

Ed

I own a condo I bought in 2007. In 2008 I started creating a small business that I will be running out of my condo. I have some business expenses but as of yet, I do not have any income/sales from it.
Do I put my condo as a Capitol Cost Allowance?
If so, how do I do it?

Thank you!

Don’t forget that claiming CCA on a property can come with a hefty penalty when you sell it. If the property has increased in value, then in addition to paying capital gains tax (50% of the gain is added to your income), you will have to pay back 100% of the CCA deductions. All this is added to your income in a single year, which might push you into a higher tax bracket (assuming you’re not already in the highest). So while you can get the deductions each year at your current marginal rate, you might have to pay them back at a higher rate! Now lets say you did something smart with the deductions each year, like paying down your mortgage or making good investments. If you sell the property in 10 years, the savings/earnings that you accumulate could very easily exceed the penalty incurred upon sale. That is why I stated earlier that CCA may be bad if you’re selling soon. Claiming CCA may also be bad if you currently have a low marginal rate (deduction isn’t worth as much) or if you spend the deduction instead of investing it.

The best example of an asset for straight-line depreciation would be leasehold improvements. If a tenant has a 5-year leave and spends $50,000 improving their unit (common in commercial leases), then the tenant can claim $10,000/year.

Landlords sometimes claim leasehold improvements as well, if done for a specific tenant.

Most of the time, CCA is good to claim, but you cannot claim it unless you have a rental profit. You cannot create or increase a rental loss with CCA.

The one time you should never claim CCA is if you rent out a part of your home. If you claim any CCA, use lose the principal residence designation and may have to pay capital gains tax plus CCA recapture when you sell your home.

Ed

The capital cost will never reach zero, as Elbyron said. If you tear down and build a new house, it will be a terminal loss on the old building and the cost of building will be the cost of the new building.

For buiildings, each one is a separate asset, and the land is a separate, non-depreciable asset.

Ed

In your situation, it sounds like CCA would be wise, since it is a full deduction vs. only a part deduction for a capital loss.

If you have not bought a new home and there is doubt as to how long you will hold the condo, you can elect to have your former residence temporarily maintained as an principal residence for up to 4 years.

Ed

I’m not sure which asset classes use the straight line method (which could drop the capital cost to zero), but rental property always uses the declining balance method.

With respect the claiming CCA against the building – I see from the CRA link that 5% can be claimed annually. My questions is what happens when you reach 100% – presumably many people will hold their rental properties longer than 20 years. So is the 5% based on the original purchase/assessed value, or will this float with the actual value of the property?

I’m interested to hear what others think about when to claim or when not to claim CCA deductions…

Wish there was an easier system….

I assume claiming CCA would be wise in this position, since I wouldn’t have a capital gain, and a capital loss would only be applicable against capital gains?

When you sell your property it causes CCA recapture. So in the example above you pay full tax rate on the 100k and capital gains on the 20k. What you could do is claim the CCA each year use the tax refund to prepay your mortgage. When the house is sold use the money to pay off the mortgage and the tax bill. This way your saving the interest on the tax refunds.

All that being said you’re only allowed too claim 4% per year on buildings and you can’t claim anything on the land. so the benefit is very small.