Jul 19, 2017
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“X will lose out on claiming $60 of available losses for the year.”
It is common for taxpayers to own rental properties as an investment rather than as a business. In general, a taxpayer can claim a deduction for depreciation of the cost of the rental property (other than the cost of the land), when calculating income for tax purposes.
However, except for a corporation whose principal business throughout the year is the leasing or rental of real property that it owns, the tax depreciation (capital cost allowance — CCA) claimed against rental income cannot be used to create or increase a loss from the renting or leasing activities. This restriction applies even if the taxpayer earns the rental income through a partnership.
Many taxpayers do not realize that this restriction is applied on an aggregate basis, rather than applying to each property.
For example, assume X has two rental properties, A and B. Property A has income of $100 after CCA, and Property B has a loss of $40 before CCA. In this example, X can claim CCA on Property B, even though it has a loss, because the total rental income from Properties A and B is $60. X can claim up to $60 of CCA on Property B, to increase its loss to $100. If X believes that the restriction applies to each property, X will lose out on claiming $60 of available losses for the year.
As noted above, there is no CCA restriction if the taxpayer is a corporation whose principal business, throughout the taxation year, is the leasing or rental of real property that it owns. If the rental business is carried on through a partnership, the same exception applies if all members are corporations whose principal business is the leasing or rental of real property.
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.