CCA Recapture: The Rental Tax Trap Most Investors Forget
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In brief — No. Recapture is taxed at 100% as ordinary income in the year of sale. Only the capital gain, the appreciation above original cost, is taxed at the 50% inclusion rate.
Capital cost allowance (CCA) is one of the most powerful tax levers in Canadian real estate: it lowers your taxable rental income every year with no cash outlay. But it hides a catch that surprises investors at sale — recapture. This is a federal rule (CRA); only your marginal rate, which sets the actual tax, varies by province.
What CCA is
CCA lets you deduct part of the building's cost each year for wear and tear. A residential rental building is generally Class 1, depreciated at 4% on a declining balance. Three rules matter:
- Land is not depreciable — only the building. Split the purchase price between land and building.
- Full first-year deduction (AII) — the Accelerated Investment Incentive suspends the old half-year rule for eligible property available for use before 2028, so you claim the full rate in year one (4% for Class 1). The old half-year rule (2%) now applies only to non-eligible property.
- Rental loss restriction — CCA cannot create or increase a rental loss; it can bring net rental income to zero, no lower.
CCA is optional — you choose how much to claim each year, from zero to the maximum. That flexibility is the whole planning game.
UCC and how recapture is triggered
Every dollar of CCA claimed reduces the undepreciated capital cost (UCC). When you sell, the proceeds (capped at original cost) are compared to UCC. If proceeds exceed UCC, the difference is the CCA you deducted "for nothing" — and the CRA recaptures it.
The surprise: recapture is taxed at 100%, as ordinary income in the year of sale — not at 50% like a capital gain. The tax you saved for years becomes due at once.
Recapture vs capital gain
| CCA recapture | Capital gain | |
|---|---|---|
| Triggered by | Proceeds > UCC | Sale price > total cost |
| Inclusion rate | 100% | 50% |
| Cap | Limited to CCA claimed | Unlimited |
Sell for more than you paid and you claimed CCA, and you can face both at once. See capital gains on a rental property.
Should you claim CCA?
Because it is optional, the real question is whether it pays in your case. Compare your marginal rate today (where CCA saves tax) to your marginal rate at sale (where recapture is taxed). Claiming CCA works best if you expect a lower rate at sale or hold for a long time — the interest-free deferral has value. It is weaker if you plan a quick sale in a high-income year.
Watch the 365-day anti-flipping rule (since Jan 1, 2023): sell a residential property held under 12 months and the profit is 100%-taxable business income.
Model it before you buy
DeedWorth computes Class 1 CCA with the applicable first-year rule (AII: half-year suspended) and loss restriction, projects UCC year by year, and calculates recapture and capital gain net at sale over 10 years — so you see the true after-tax return. Analyze a property with DeedWorth →
FAQ
Is CCA recapture taxed at 50% like a capital gain? No. Recapture is taxed at 100% as ordinary income in the year of sale. Only the capital gain, the appreciation above original cost, is taxed at the 50% inclusion rate.
Do I have to claim CCA every year? No. CCA is optional. You can claim from zero up to the maximum each year, and you optimize it based on your marginal rate now versus at sale.
Is land depreciable? No. Only the building qualifies for CCA, so you must split the purchase price between land and building.
Can CCA create a rental loss I deduct from other income? No. CCA cannot create or increase a rental loss. At most it brings net rental income to zero.
Does recapture vary by province? The recapture rule is federal and the same everywhere. Only your marginal tax rate, which sets the actual tax, varies by province.
Related guides
- Deductible rental expenses in Canada
- Rental income and tax: T776 / TP-128
- Capital gains on a rental property
- Buying a first plex in Quebec
For information only, not tax, legal or financial advice. Rules change; confirm with an accountant or mortgage professional. Last verified: July 2026.