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Rental Property - Capital Cost Restrictions

Subject: CCA - Rental Income Number: 06-28 Date: 10/27/2006

Capital cost allowance on rental properties can be restricted to net rental income earned

The Regulations in the Income Tax Act restrict the amount of capital cost allowance (CCA) that would otherwise be deductible in respect of a rental property.

The Regulation applies where a taxpayer owns property of a prescribed CCA class and that class includes rental property owned by the taxpayer.

The taxpayer's total allowable claim may not exceed the amount by which the taxpayer's net income (before CCA) from renting or leasing rental property owned by the taxpayer (including its share of rental income from a partnership) exceeds its net losses from renting or leasing rental property owned by the taxpayer (including its share of rental losses from a partnership).

Recaptured CCA on the sale of a rental property is included in the above deduction limit for CCA. Similarly, a terminal loss is deducted from the income limit before CCA on the other properties can be claimed.

The taxpayer must combine all its rental income and losses to determine its allowable claim. The restriction is not on a property-by-property basis.

If there is more than one CCA class for rental properties, that taxpayer may choose which CCA pools report CCA (up to the each pool's individual annual deduction limit), as long as the total CCA on rental properties do not exceed the total limit based on net rental income.

The purpose of this legislation is to restrict the amount of rental losses that can be applied against other income sources. This is why the restriction does not apply to a corporation "whose principal business was the leasing, rental, development or sale (or any combination thereof) of real property owned by it." For these corporations, rental losses are effectively trapped in a corporation until future income is earned.

In determining the particular CCA pool(s) where CCA is to be claimed, one must consider possible future sales of a particular property, so that future CCA recapture can be minimized.

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