Example of capital cost allowance (CCA) calculation

Example

Paul bought a house to use for rental purposes. The building is classified as Class 1 with a CCA rate of 4%. It is his only rental property. The total cost to purchase the land and building was $95,000 ($90,000 total purchase price plus $5,000 total expenses connected with the purchase).

The breakdown of the total purchase price is as follows:

Building value (Class 1)

$75,000
 
Plus: land value

$15,000

 
Equals: total purchase price

$90,000

 

The breakdown of the expenses connected with the purchase is as follows:

Legal fees
$3,000
 
Plus: land transfer tax
$2,000
 
Equals: total expenses connected with the purchase
$5,000

 

Paul's rental activity is reported on a December 31 year-end basis. For the year, Paul's gross rental income was $6,000 and his rental expenses were $4,900. Therefore, his net rental income before deducting CCA is $1,100 ($6,000 - $4,900).

Paul wants to deduct as much CCA as he can against his rental income. This amount is limited to the CCA available, and his net rental income for the year (you cannot create or increase a rental loss by claiming CCA).

Paul, to determine the CCA available, can only claim CCA on the capital cost of the building, since land is not depreciable property, he has to first determine the part of the expenses connected with the total purchase that relates only to the purchase of the building. To determine this amount, he calculates the portion of his expenses that relate to the purchase of the building as follows:

Building value ($75,000) ÷ total purchase price ($90,000) × total expenses ($5,000) = part of the expenses that can be added to the cost of the building ($4,166.67). The remaining $833.33 of the total expenses relates to the purchase of the land.

Therefore, the capital cost of the building is:

Building value (Class 1)

$75,000
 

Plus: total expenses connected with the purchase of the building

$4,166.67
 

Equals: capital cost of the building

$79,166.67

He includes $15,833.33 ($15,000 + $833.33) as the capital cost of the land.

Paul did not owned rental property before the current year. Therefore, he has no undepreciated capital cost (UCC).

Paul acquired his rental property during the current year. Therefore, he is subject to the half-year rule.

Although he would otherwise be entitled to claim $1,583.33 [($79,166.67 × 50%) × 4%], Paul cannot claim more than $1,100 of CCA because this is the amount of his net rental income.

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