When a rental property is purchased, the split of cost
between land and building should be agreed upon by the vendor and purchaser.
The vendor may want a higher portion of the selling price to be allocated to
land, in order to avoid recapture of capital cost allowance, if any has been
claimed. The purchaser may want a higher portion of the purchase price
to be allocated to building, in order to claim more capital cost allowance.
For more information on capital
cost allowance (CCA), see our article on property rental deductible expenses -
For information on the
deductibility of interest expense on funds borrowed to purchase rental
property, see our link below.
When a rental property is sold,
the amount that is the lower of cost or proceeds from the sale of the building
is entered in the capital cost allowance schedule on the T776. The
difference between this amount and the undepreciated capital cost (UCC) will be
brought into income as recapture.
This amount will be nil if no capital cost allowance has ever been claimed for
the building. The proceeds from the sale of the land is entered on line
9924 of the T776. Any capital gain
or loss (proceeds less cost) is recorded on Schedule
3. Generally, allowable capital losses can only be used to reduce or
eliminate taxable capital gains.
Canada Revenue Agency (CRA) has a
Income Tax Guide (T4036) which goes into detail about deductible expenses,
capital cost allowance, deemed dispositions, splitting of expenses between
personal areas and rental areas, and most issues regarding
See all our articles related to Property
If your rental property is in another country and the cost exceeds
$100,000 Canadian, including the cost of any capital improvements made after
the original purchase, then you must complete form T1135,
Foreign Income Verification Statement. There are penalties for not
completing this form.
Before purchasing property for rental purposes, talk to a professional
accounting/tax advisor, and know the tax rules!
Revised: April 15, 2014