CCA on a building, and the recapture bill when you sell it

Summary

If your corporation owns a building, it can take part of what the building cost off its taxable income every year. The deduction is capital cost allowance, or CCA, the tax system’s version of depreciation: instead of deducting the whole price the year you buy, you deduct a slice a year across the years you use the building. When the corporation sells, the rules add those deductions back into its income in one year, up to the total claimed. That add-back is recapture, and deciding what to claim breaks into four steps:

1. Split the purchase price between the land and the building, because land can never be depreciated and the building’s share is the ceiling on the whole claim. If that share is $2,000,000, then $2,000,000 is the most your corporation will ever deduct.
2. If the building isn’t housing, attach a short letter to the corporation’s tax return for the year it bought the building. A letter like that is called an election, and it takes the annual deduction from 4% of the building’s remaining undeducted cost to 6%. Both figures cut taxable income rather than handing you tax back.
3. Check whether a claim is available at all, because CCA on a building the corporation rents out can’t create or increase a loss. Mortgage interest is itself deductible, so a heavily mortgaged building often costs more to hold than it collects in rent, and where rent minus expenses is already below zero there’s no claim that year.
4. Then decide how much to claim, and we’d claim the maximum where the corporation occupies the building itself (e.g. a clinic, a shop or a warehouse it works out of), because the deduction now and the recapture later are taxed at broadly the same corporate rate, so in between it has the use of cash it would otherwise have paid in tax.

We’d claim less where you expect to sell within about five years, since a deferral is only worth the return you earn on the tax you didn’t pay. Everything below assumes your corporation owns the building, not you personally.

Splitting the price between land and building

The tax rules treat the land and the building standing on it as two separate assets, and land can’t be depreciated, so a blended purchase price has to be split in two.¹ Only the building’s share goes into a CCA class, which is the bucket the rules sort an asset into. Each class keeps a running balance that starts at the building’s share and falls by every claim you make. The class percentage is the most you may deduct in a year, and you can always claim less.

There’s no prescribed formula for the split, and the Income Tax Act asks only that the allocation be reasonable.¹ Owners commonly use the land-to-building split printed on the municipal property assessment notice (i.e. the notice your city sends each year setting the value your property tax is based on, which values land and building separately). That’s a convention rather than a rule, and the Canada Revenue Agency (the CRA) can substitute its own reasonable allocation whatever the closing documents say. On anything sizeable we’d pay for an appraisal instead, because that’s what makes the split defensible. Our own line for sizeable is a building share above $1,000,000, and it’s arbitrary.

The rate, and the election behind the higher rate

Buildings bought since 1987 sit in Class 1 and are deducted at 4% a year on a declining balance, meaning 4% of whatever is left of the class balance.¹

A building that isn’t housing, which the rules call non-residential, can get an additional 2%, for 6% in total. Non-residential means not used to house people, so a shop, clinic, warehouse or office counts and an apartment building doesn’t. At least 90% of the floor space also has to be in non-residential use at the end of every tax year, so a ground-floor shop with apartments above it gets nothing.² The building also has to be “eligible”, which is a date test: in Canada, acquired on or after March 19, 2007, and never used or acquired to be used by anybody before that date. A warehouse built in 2015 qualifies whenever you buy it, because nobody could have used it before 2007, while a 1998 warehouse never does.

The extra 2% depends on an election, which is a formal choice made on a tax return. Here it’s a letter attached to the corporation’s return for the year the building was acquired, and there’s no form to fill in.² File nothing and the corporation stays at 4% for as long as it owns the building. The election also has a price: it puts the building in a class of its own, and buildings sharing a class share one running balance, so a sale price coming off a shared balance often leaves nothing to tax. An owner of several owner-occupied buildings gives that up. Rental buildings are in separate classes anyway, one for each building costing $50,000 or more and bought from an unrelated seller, so selling one crystallises its own recapture with nothing to absorb it.³

A plant used to manufacture or process goods can qualify for a higher rate again, and a bill now before Parliament would allow its whole cost in the first year. Both sit outside this page, so a manufacturer shouldn’t finalise a claim off this article.⁴

The annual cap on rental buildings

CCA on a building the corporation rents out can’t create or increase a rental loss, and the cap is worked out across every rental building it owns together: the rent collected minus every other expense (e.g. mortgage interest, property tax, insurance and repairs), before any CCA.⁵ A corporation whose principal business is renting, developing or selling the real estate it owns escapes the cap. An operating company, meaning a corporation whose real business is something else like a clinic or a shop, doesn’t escape it just because the building it rents out is the only one it owns. As such, on a heavily mortgaged rental the honest answer to “should I claim CCA” is often that you can’t.

What happens at the sale

When the corporation sells, an amount comes off the class’s running balance: the lesser of the sale price, net of legal fees and other selling costs, and what the building originally cost. That test splits a sale into three results.⁶

Recapture comes first, and it happens where taking that amount off the running balance pushes the balance below zero as at the corporation’s fiscal year end, the date its tax year closes, which needn’t be December 31. The negative amount is added to the corporation’s income for that year, every dollar of it, unlike a capital gain where only half counts, and it’s taxed at the corporation’s normal rate rather than a reduced one.

Second, a balance left in the class once no property of that class remains is deducted in full as a terminal loss. It isn’t something to plan on, because where the land sells the same year at a gain the rules shift proceeds across to the building and cut the loss away.⁶

Third, anything received above the building’s original cost is a capital gain, of which half is added to the corporation’s income and taxed while the other half isn’t taxed at all.⁷ The land is dealt with separately, and since no CCA was ever claimed on it, it can only produce a capital gain or loss rather than recapture.

Owners are frequently told, wrongly, that claiming CCA enlarges the capital gain. CCA reduces the class’s running balance, not the price the corporation paid, and the gain is measured against that price. It’s the same whether the corporation claimed the maximum or nothing at all.

What the recapture costs

Where the corporation occupied the building for its own business, the recapture is active business income, meaning income from the business it actually operates rather than from owning things. Active business income is taxed at the small business rate, 9% federally on the first $500,000 of it a year, so long as the corporation hasn’t used that $500,000 limit up already.⁸ Where it rented the building out, collecting rent with five or fewer full-time employees is treated as investment rather than active business, so the recapture is investment income instead. Investment income meets a materially higher corporate rate, part of which comes back to the corporation only when it pays dividends out to you.⁹ Adjusted aggregate investment income, broadly that investment income with a few adjustments, also cuts the $500,000 limit for the following year. The cut is $5 for every $1 above $50,000, wiping the limit out at $150,000, counted across every corporation yours is associated with.¹⁰ Our guide to the passive income grind covers which corporations count as associated.

How often this changes

Three of the moving parts run on an annual cycle. The 90% floor-space test is applied at the end of every tax year, so a landlord who converts part of a shop to apartments drops from 6% back to 4%. The cap on rental buildings is re-tested against that year’s income. And the amount claimed is a fresh choice every year, from nothing up to the maximum, though skipping a year doesn’t earn a double deduction later, because the balance just comes down more slowly. The election is the exception, with one deadline and no obvious second chance. We’d re-read any building analysis after a federal budget too. The annual rates haven’t moved, but the first-year treatment has changed twice since 2024, so a building bought after 2024 gets a materially larger first-year deduction, covered in what changed for 2026.

Closing thoughts

Owners spend their worry on the recapture at the end. Most of the size of that bill was settled on the day of the purchase, by how the price was divided between land and building and whether a one-page letter went in with the first tax return, both of which happen when buying a building still feels like a financing problem rather than a tax one.

How we handle it

We set the CCA schedule up when the building goes on the balance sheet, splitting land from building off the closing documents and filing the separate-class election with the acquisition-year return. Each year we test the rental cap before choosing the claim, and where a sale is coming we model the recapture, and the year it lands in, before the closing date is fixed.