Determining the capital cost of property in special situations
On this page:
- Non-arm's length transactions
- Capital cost calculation (Non-arm's length transaction – Resident of Canada)
- Capital cost calculation (Non-arm's length – non-resident transaction)
- Grants, subsidies, and other incentives or inducements
- Disposing of a building in the year
- Calculation A – Land and building disposed of in the same year
- Calculation B – Land and building disposed of in different years
- Changing from personal to rental use
- Capital cost calculation (Change in use)
- Selling your rental property
- Replacement property
The following topics will help you determine the capital cost of your rental property in certain situations.
Non-arm's length transactions
When you acquire rental property (depreciable property) in a non-arm's length transaction, there are special rules for determining the property's capital cost. These special rules do not apply if you acquire the property because of someone's death.
You can acquire depreciable property in a non-arm's length transaction from:
- an individual resident in Canada
- a partnership with at least one partner who is an individual resident in Canada
- a partnership with at least one partner who is another partnership
If you pay more for the rental property than the seller paid for it, calculate the capital cost as follows:
Capital cost calculation
Non-arm’s length transaction – Resident of Canada
The seller's cost or capital cost
The seller's proceeds of disposition
Amount from line 1
Line 2 minus line 3 (if negative, enter "0")
Enter any capital gains deduction claimed for the amount at line 4Footnote 1
Line 4 minus line 5 (if negative, enter "0")
Capital cost
Line 1 plus line 6
You can also acquire depreciable property in a non-arm's length transaction from:
- a corporation
- an individual who is not resident in Canada
- a partnership with no partners who are individuals resident in Canada or with no partners that are other partnerships
If you pay more for the rental property than the seller paid for it, calculate the capital cost as follows:
Capital cost calculation
Non-arm's length transaction – Non-resident of Canada
The seller's cost or capital cost
The seller's proceeds of disposition
Amount from line 1
Line 2 minus line 3 (if negative, enter "0")
Capital cost
If you acquire depreciable property in a non-arm's length transaction and pay less for it than the seller paid, your capital cost is the same amount as the seller paid. The difference between what you paid and what the seller paid is considered to be deducted as capital cost allowance (CCA). Enter the amount you paid in column 3 of Area A. Enter the same amount in Area B or C, whichever applies.
Example
Teresa bought a refrigerator from her father, Roman, for $400 to use in her rental operation. Roman paid $1,000 for the refrigerator and was using it in his rental operations. Since the amount Teresa paid is less than the amount Roman paid, the CRA considers Teresa's cost to be $1,000. It also considers that Teresa has deducted CCA from the amount of $600 in the past ($1,000 - $400).
- In Area B, Teresa enters $1,000 in column 3, "Total cost."
- In Area A, she enters $400 in column 3, "Cost of additions in the year," as the addition for the current tax year.
For more information on non-arm's length transactions, see Income Tax Folio S1-F5-C1, Related Persons and Dealing at Arm's Length.
Grants, subsidies, and other incentives or inducements
When you get a grant, subsidy, or rebate from a government or a government agency to buy depreciable property, subtract the amount of the grant, subsidy, or rebate from the property's capital cost. Do this before you enter the capital cost in column 3 of Area B or C.
Example
You buy a rental property at a cost of $200,000 ($50,000 for the land and $150,000 for the building) and receive a $50,000 grant. The $50,000 grant is split in a similar way between the land and building. The total cost of the purchase is reduced to $150,000: $37,500 for the land and $112,500 for the building. Enter the reduced capital cost in column 3 of Area B or C.
For more information, go to Interpretation Bulletin IT-273, Government Assistance – General Comments.
In this case, you can include the amount in your rental income or you can deduct the amount from the capital cost of the rental property. You may get an incentive from a non-government agency to buy depreciable property. For example, you may receive a tax credit that you can use to reduce your income tax payable.
If the purchase price of your property was reduced due to poor quality or for other reasons, go to Income Tax Folio S3-F4-C1, General Discussion of Capital Cost Allowance, for more information about how to calculate your capital cost.
Disposing of a building in the year
If you disposed of a building in the current tax year, special rules may apply making the proceeds of disposition an amount other than the actual proceeds of disposition. This happens when you meet both the following conditions:
- you disposed of the building for an amount less than both its cost amount, as calculated below, and its capital cost to you
- you, or a person with whom you do not deal at arm's length, owned the land the building is on, or the land next to it, which was necessary for the building's use
To calculate the cost amount:
- if the building was the only property in the class, the cost amount is the undepreciated capital cost (UCC) of that class before you disposed of the building
- if more than one property is in the same class, you have to calculate the cost amount of each building as follows:
(Capital cost of the building ÷ Capital cost of all properties in the class not previously disposed of) × UCC of the class = Cost amount of the building
Note
If a building acquired in a non-arm's length transaction was previously used for something other than producing income, the capital cost of the property will need to be recalculated to determine the cost amount of the building.
If you disposed of a building under these conditions, and you or a person with whom you do not deal at arm's length disposed of the land in the same year, calculate your deemed proceeds of disposition as shown in Calculation A.
If you or, a person with whom you do not deal at arm's length, did not dispose of the land in the same year as the building, calculate your deemed proceeds of disposition for the building as shown in Calculation B.
Usually, you can deduct 100% of a terminal loss, but only 50% of a capital loss. Calculation B makes sure you use the same percentage to calculate both a terminal loss on a building and a capital loss on land. As a result of this calculation, you add 50% of the amount on line 5 to the actual proceeds of disposition from the building.
Calculation A – Land and building disposed of in the same year
1. FMV of the building when you disposed of it
2. FMV of the land just before you disposed of it
3. Line 1 plus line 2
4. Seller's adjusted cost base of the land
5. Total capital gains (without reserves) from any disposition of the land (such as a change in use) by you, or by a person not dealing at arm's length with you, in the three-year period before you disposed of the building, to you or to another person not dealing at arm's length with you
6. Line 4 minus line 5 (if negative, enter "0")
7. Line 2 or line 6, whichever amount is less
8. Line 3 minus line 7 (if negative, enter "0")
9. Cost amount of the building just before you disposed of it
10. Capital cost of the building just before you disposed of it
11. Line 9 or line 10, whichever amount is less
12. Line 1 or line 11, whichever amount is more
Deemed proceeds of disposition of the building
13. Line 8 or line 12, whichever amount is less (enter the amount from line 13 in column 3 of Area E and include it in column 5 of Area A)
Deemed proceeds of disposition of the land
14. Proceeds of disposition of the land and building
15. Amount from line 13
16. Line 14 minus line 15 (enter this amount at line 9924 of Area F)
If you have a terminal loss on the building, include it at line 9948 – Terminal loss.
Calculation B – Land and building disposed of in different years
1. Cost amount of the building just before you disposed of it
2. FMV of the building just before you disposed of it
3. Line 1 or line 2, whichever amount is more
4. Actual proceeds of disposition, if any
5. Line 3 minus line 4
6. Amount from line 5
7. Amount from line 4
Deemed proceeds of disposition for the building
8. Line 6 plus line 7 (enter this amount in column 3 of Area E and include it in column 5 of Area A)
If you have a terminal loss on the building, include it at line 9948 – Terminal loss.
Changing from personal to rental use
If you bought a property for personal use and then changed the use to a rental in your rental operation in the current tax year, there is a change in use of the property. You need to determine the capital cost of the property at the moment of this change.
If the fair market value (FMV) of a depreciable property (such as equipment or a building) is less than its original cost when you change its use, the amount you put in column 3 of Area B or C is the FMV of the property (excluding the land value if the property includes land and a building). If the FMV is more than the original cost of the property when you change use, use the following chart to determine the amount to enter in column 3.
Capital cost calculation
Capital cost calculation – Change in use
Actual cost of the property
FMV of the property
Amount from line 1
Line 2 minus line 3 (if negative, enter "0")
Enter any capital gains deduction claimed for the amount at line 4.Footnote 3
Line 4 minus line 5 (if negative, enter "0")
Capital cost
Line 1 plus line 6
Enter the capital cost of the property from line 7 in column 3 of Area B or C.
Note
The CRA considers you to have acquired the land for an amount equal to the FMV when you changed its use. Enter this amount at line 9923 in Area F, "Land additions and dispositions in the year."
Selling your rental property
If you sell a rental property for more than it cost, you may have a capital gain. List the dispositions of all your rental properties on Schedule 3, Capital Gains (or Losses). For information on how to calculate your taxable capital gain, see guide T4037, Capital Gains.
Note
If you owned the property for less than 365 consecutive days before the disposition, you may have a flipped property.
If you are a partner in a partnership that has a capital gain, the partnership will allocate part of that gain to you. The gain will show on the partnership's financial statements or in box 151 of your Slip T5013, Statement of Partnership Income. Report the gain at line 17400 of Schedule 3.
Note
You cannot have a capital loss when you sell depreciable property. However, you can have a terminal loss. For more information, go to Column 7 – UCC after additions and dispositions.
Replacement property
In some cases, you can postpone or defer including a capital gain or recapture of capital cost allowance in calculating income. Your property might be stolen, destroyed, or expropriated, and you replace it with a similar one. To defer reporting the gain or recapture of CCA, you (or a person related to you) must acquire the replacement property within the specified time limits and use the new property for the same or similar purpose.
You can also defer a capital gain or recapture of CCA when you transfer rental property to a corporation, a partnership.
Forms and publications
- Guide T4036, Rental Income
- Guide T4037, Capital Gains
- Form T776, Statement of Real Estate Rentals
- Interpretation Bulletin IT-291, Transfer of Property to a Corporation Under Subsection 85(1)
- Interpretation Bulletin IT-378, Winding-up of a Partnership
- Interpretation Bulletin IT-413, Election by Members of a Partnership Under Subsection 97(2)
- Information Circular IC76-19, Transfer of Property to a Corporation Under Section 85
- Income Tax Folio S1-F5-C1, Related Persons and Dealing at Arm's Length
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