Determining the capital cost of property in special 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 get 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 the same rental property, calculate the capital cost as follows:

Capital cost calculation (non-arm's length transaction)

Capital cost calculation (non-arm’s length transaction)

1. The seller's cost or capital cost

 
$ Blank space for dollar value
Line 1

2. The seller's proceeds of disposition

$ Blank space for dollar value
Line 2

3. Amount from line 1

$ Blank space for dollar value
Line 3

4. Line 2 minus line  3 (if negative, enter "0")

$ Blank space for dollar value
Line 4

5. Enter any capital gains deduction claimed for the amount at line 4Footnote 1

$ Blank space for dollar value
× 2 =
$ Blank space for dollar value
Line 5

6. Line 4 minus line 5 (if negative, enter "0")

$ Blank space for dollar value
× ½ =
$ Blank space for dollar value
Line 6

Capital cost
7. Line 1 plus line 6

 
$ Blank space for dollar value
Line 7

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 the same rental property, calculate the capital cost as follows:

Capital cost calculation (non-arm's length, non-resident transaction)

Capital cost calculation (non-arm's length, non-resident transaction)

1. The seller's cost or capital cost

 
$ Blank space for dollar value
Line 1

2. The seller's proceeds of disposition

$ Blank space for dollar value
Line 2

3. Amount from line 1

$ Blank space for dollar value
Line 3

4. Line 2 minus line 3 (if negative, enter "0")

$ Blank space for dollar value
× ½ =
$ Blank space for dollar value
Line 4

Capital cost
5. Line 1 plus line 4

 
$ Blank space for dollar value
Line 5

Enter this amount in column 3 of either Areas B or C, whichever applies. Do not include the cost of the related land. Include the cost of the related land at line 9923 in Area F, "Total cost of all land additions in the year."

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 originally 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, we consider Teresa's cost to be $1,000. We also consider 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.  

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

If 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 as the cost of the property. The total cost of the purchase is reduced to $150,000: the purchase price of the land is reduced to $37,500 and the purchase price of the building is reduced to $112,500. Enter the reduced capital cost in column 3 of Area B or C.

For more information, go to Interpretation Bulletin IT-273R2, 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 on 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 that make the proceeds of disposition you calculate 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 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 such 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

Calculation A – Land and building disposed of in the same year

1. FMV of the building when you disposed of it

$ Blank space for dollar value
Line 1

2. FMV of the land just before you disposed of it

+ $ Blank space for dollar value
Line 2

3. Line 1 plus line 2

= $ Blank space for dollar value
>
$ Blank space for dollar value
Line 3

4. Seller's adjusted cost base of the land

$ Blank space for dollar value
Line 4

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

− $ Blank space for dollar value
Line 5

6. Line 4 minus line 5 (if negative, enter "0")

= $ Blank space for dollar value
Line 6

7. Line 2 or line 6, whichever amount is less

− $ Blank space for dollar value
Line 7

8. Line 3 minus line 7 (if negative, enter "0")

= $ Blank space for dollar value
Line 8

9. Cost amount of the building just before you disposed of it

$ Blank space for dollar value
Line 9

10. Capital cost of the building just before you disposed of it

$ Blank space for dollar value
Line 10

11. Line 9 or line 10, whichever amount is less

$ Blank space for dollar value
Line 11

12. Line 1 or line 11, whichever amount is more

$ Blank space for dollar value
Line 12

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)

$ Blank space for dollar value
Line 13

Deemed proceeds of disposition of the land

14. Proceeds of disposition of the land and building

$ Blank space for dollar value
Line 14

15. Amount from line 13

− $ Blank space for dollar value
Line 15

16. Line 14 minus line 15 (enter this amount at line 9924 of Area F)

= $ Blank space for dollar value
Line 16

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

Calculation B – Land and building disposed of in different years

1. Cost amount of the building just before you disposed of it

$ Blank space for dollar value
Line 1

2. FMV of the building just before you disposed of it

$ Blank space for dollar value
Line 2

3. Line 1 or line 2, whichever amount is more

$ Blank space for dollar value
Line 3

4. Actual proceeds of disposition, if any

− $ Blank space for dollar value
Line 4

5. Line 3 minus line 4

= $ Blank space for dollar value
Line 5

6. Amount from line 5

$ Blank space for dollar value
× ½
= $ Blank space for dollar value
Line 6

7. Amount from line 4

+ $ Blank space for dollar value
Line 7

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)

= $ Blank space for dollar value
Line 8

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.

Capital cost calculation (Change in use)

Capital cost calculation (change in use)

1. Actual cost of the property

 
$ Blank space for dollar value
Line 1

2. FMV of the property

$ Blank space for dollar value
Line 2

3. Amount from line 1

$ Blank space for dollar value
Line 3

4. Line 2 minus line 3 (if negative, enter "0")

$ Blank space for dollar value
Line 4

5. Enter any capital gains deduction claimed for the amount at line 4.Footnote 1

$ Blank space for dollar value
× 2 =
$ Blank space for dollar value
Line 5

6. Line 4 minus line 5 (if negative, enter "0")

$ Blank space for dollar value
× ½ =
$ Blank space for dollar value
Line 6

Capital cost
7. Line 1 plus line 6

 
$ Blank space for dollar value
Line 7

Note

We consider you to have acquired the land for an amount equal to the FMV when you changed its use.

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).

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 174 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 Line 9948 – Terminal loss.

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 when you transfer rental property to a corporation, a partnership.

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