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12 Feb

Rental Property Tax Planning: To Depreciate or Not

Income Tax

Posted by: Garth Chapman

On your tax return you have the option to depreciate your buildings (to claim CCA).  The elements of this to consider include those below, and perhaps others as well.  This is both a tax planning decision and a mortgage qualification capacity decision. Here are 8 key points to understand and consider when deciding whether to depreciate or not:

  1. Claiming the CCA is actually optional and it can be started and stopped from year to year. Note that from a tax perspective CCA cannot be taken on a property that has the possibility of a principle residence exemption. So while CCA may be beneficial from a tax perspective a conversation is needed with the accountant about the ability to qualify for mortgages. Otherwise the tax savings will leave a sour taste in everyone’s mouth.
  2. CCA cannot be taken on a property that has the possibility of a principle residence exemption.
  3. Claiming CCA reduces your ‘cost base’ for the property.  This results in a higher Capital Gains tax when you sell the property.
  4. If you claim CCA you are depreciating for tax purposes the buildings on the land. The land does not depreciate.
  5. If you claim CCA (depreciate your buildings) you will reduce your taxes now, but you will pay more tax when you sell the properties, as you will have to ‘recapture’ the previously claimed CCA.  This means that you are essentially deferring the taxes due to a future date, and you might also be paying at a rate lower than what you would pay without depreciating.
  6. If you claim CCA the taxes currently saved are taxes on income whereas the future taxes are on capital gains, and there may be a difference in rate between the two.
  7. Consider what your likely income will be at the time you sell the properties, and how that might impact your tax rate then as compared to now.
  8. When you claim CCA you thereby reduce your income from the properties on your tax return.  Lower income can have a negative impact on your ability to obtain further mortgages from some lenders. This is a very important consideration, so consult on this piece with both your tax professional and your Mortgage Broker.

These tips are what I have learned over the years from various Canadian Tax Accountants.  Your own situation is always unique, so always seek out professional advice before you make tax decisions.

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