Tax Tips

• Tax Tips Archive

Separate Class for Rental Buildings

Subject: CCA - Rental Properties Number: 07-02 Date: 1/26/2007

The allocation of purchase price is important on the purchase of rental properties

When a rental building is acquired at a cost of $50,000 or more, it must be included in a separate capital cost allowance class. At present, a building that costs more than $50,000 would be included in Class 1 and depreciated at a 4% declining balance rate.

In determining whether a building costs $50,000 or more, furniture and fixtures are excluded. If a company acquires a rental property for $60,000, of which $15,000 is allocated to land, it does not have to be included in a separate class.

Where a building is under construction, it will be placed in a separate class until it is complete. Even though a building is in a separate class, it cannot be depreciated until it is available for use. The cost can be accumulated in a separate class, but no depreciation can be taken until the property can be rented out.

A rental property is defined as a building used principally for the purpose of gaining or producing gross revenue that is rent. “Principally” is usually considered to mean more than 50%. The courts have generally held that floor space allocation is the key criterion in determining whether a property is considered a rental property.

When a rental property is purchased, it is important to determine the allocation between building, land and other depreciable property. The best source for the allocation is the purchase agreement. Where the purchase agreement does not include an allocation, the CRA could challenge the taxpayer’s allocation, particularly when the purchaser allocates the purchase price in one way, while the vendor allocates the sale price in a different way.

As always, clear documentation is the best defence against any CRA challenge.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.