Determining the capital cost of property in special situations
Disclaimer
We do not guarantee the accuracy of this copy of the CRA website.
Scraped Page Content
Determining the capital cost of property in special situations
On this page:
- Non-arm's length transactions
- Capital cost calculation (Non-arm's length transaction)
- Capital cost calculation (Non-arm's length - Non-resident transaction)
- Grants, subsidies, and other incentives or inducements
- Disposing of a building in the year
- Calculation A - Land and building disposed of in the same year
- Calculation B - Land and building disposed of in different years
- Changing from personal to rental use
- Capital cost calculation (Change in use)
- Selling your rental property
- Replacement property
The following topics will help you determine the capital cost of your rental property in certain situations.
Non-arm's length transactions
When you acquire rental property in a non-arm's length transaction, there are special rules for determine the property's capital cost. These special rules do not apply if you get the property because of someone's death.
If you pay more for the rental property than the seller paid for the same rental property, calculate the capital cost as follows:
Capital cost calculation (Non-arm's length transaction)
1. The seller's cost or capital cost
2. The seller's proceeds of disposition
3. Amount from line 1
4. Line 2 minus line 3 (if negative, enter "0")
5. Enter any capital gains deductions claimed for the amount on line 4
6. Line 4 minus line 5 (if negative, enter "0")
7. Capital cost: line 1 plus line 6
You can also buy depreciable property in a non-arm's length transaction from a corporation or from an individual who is not resident in Canada, or from a partnership with no partners who are individuals resident in Canada or with no partners that are other partnerships.
If you pay more for the rental property than the seller paid for the same rental property, calculate the capital cost as follows:
Capital cost calculation (Non-arm's length - Non-resident transaction)
1. The seller's cost or capital cost
2. The seller's proceeds of disposition
3. Amount from line 1
4. Line 2 minus line 3 (if negative, enter "0")
5. Capital cost: line 1 plus line 4
If you buy depreciable property in a non-arm's length transaction and pay less for it than the seller paid, your capital cost is the same amount as the seller paid. We consider you to have deducted as CCA the difference between what you paid and what the seller paid.
Example
Teresa bought a refrigerator from her father Roman for $400 to use in her rental operation. Roman originally paid $1,000 for the refrigerator and was using it in his rental operations. Since the amount Teresa paid is less than the amount Roman paid, we consider Teresa's cost to be $1,000. We also consider that Teresa has deducted CCA in the amount of $600 in the past ($1,000 - $400).
Grants, subsidies, and other incentives or inducements
You may get a grant or subsidy from a government or a government agency to buy depreciable property. When this happens, the grant reduces the cost of the land and depreciable property proportionately.
Example
You buy a rental property at a cost of $200,000 ($50,000 for the land and $150,000 for the building) and receive a $50,000 grant.
Since the $50,000 grant is split in the same proportion between the land and building as the cost of the property, the purchase price of the land is reduced to $37,500 and the purchase price of the building is reduced to $112,500.
For more information, see Interpretation Bulletin IT-273, Government Assistance - General Comments.
You may get an incentive from a non-government agency to buy depreciable property. If this happens, you can either include the amount in income or subtract the amount from the capital cost of the rental property.
If the purchase price of your property was reduced due to poor quality or other reasons, see Folio S3-F4-C1, General Discussion of Capital Cost Allowance, for more information on how to calculate your capital cost.
Disposing of a building in the year
If you disposed of a building in the year, special rules may apply that make the proceeds of disposition you calculate an amount other than the actual proceeds of disposition. This happens when you meet both the following conditions:
- You disposed of the building for an amount less than its cost amount, as calculated below, and its capital cost to you; and
- You, or a person with whom you do not deal at arm's length, owned the land the building is on or the land next to it which was necessary for the building's use.
Calculate the cost amount as follows:
- if the building was the only property in the class, the cost amount is the undepreciated capital cost (UCC) of the class before you disposed of the building;
- if more than one property is in the same class, you have to calculate the cost amount of each building as follows:
Note
If a building acquired in a non-arm's length transaction was previously used for something other than producing income, the capital cost of such property will need to be recalculated to determine the cost amount of the building.
If you disposed of a building under these conditions and you or a person with whom you do not deal at arm's length disposed of the land in the same year, calculate your deemed proceeds of disposition as shown in Calculation A. If you or, a person with whom you do not deal at arm's length, did not dispose of the land in the same year as the building, calculate your deemed proceeds of disposition for the building as shown in Calculation B.
Usually, you can deduct 100% of a terminal loss, but only 50% of a capital loss. Calculation B ensures that you use the same percentage to calculate a terminal loss on land as you use to calculate a capital loss on a building. As a result of this calculation, you add 50% of the amount on line 5 to the actual proceeds of disposition from the building.
Calculations A & B
Calculation A - Land and building disposed of in the same year
1. FMV of the building when you disposed of it
2. FMV of the land just before you disposed of it
3. Line 1 plus line 2
4. Seller's adjusted cost base of the land
5. Total capital gains (without reserves) from any disposition of the land (such as a change in use) in the three year period before you disposed of the building, by you, or by a person not dealing at arm's length with you, to you or to another person not dealing at arm's length with you
6. Line 4 minus line 5 (if negative, enter "0")
7. Line 2 or line 6, whichever amount is less
8. Line 3 minus line 7 (if negative, enter "0")
9. Cost amount of the building just before you disposed of it
10. Capital cost of the building just before you disposed of it
11. Line 9 or line 10, whichever amount is less
12. Line 1 or line 11, whichever amount is more
Deemed proceeds of disposition for the building
13. Line 8 or line 12, whichever amount is less (enter this amount in Column 3 of Part E of Form T776)
Deemed proceeds of disposition for the land
14. Proceeds of disposition of the land and building
15. Amount from line 13
16. Line 14 minus line 15 (enter this amount on line 9924 of Part F of Form T776)
Calculation B - Land and building disposed of in different years
1. Cost amount of the building just before you disposed of it
2. FMV of the building just before you disposed of it
3. Line 1 or line 2, whichever amount is more
4. Actual proceeds of disposition, if any
5. Line 3 minus line 4
6. Line 5
7. Line 4
Deemed proceeds of disposition for the building
8. Line 6 plus line 7 (enter this amount in Column 3 of Part E of Form T776)
Changing from personal to rental use
If you bought a property for personal use and then started using it in your rental operation in the current tax year, there is a change in use. You need to determine the capital cost of the property at the moment of this change of use.
Capital cost calculation (Change in use)
1. Actual cost of the property
2. FMV of the property
3. Amount from line 1
4. Line 2 minus line 3 (if negative, enter "0")
5. Enter any capital gains deduction claimed for the amount on line 4 1
6. Line 4 minus line 5 (if negative, enter "0")
7. Capital cost: line 1 plus line 6
1 Enter only the amount that relates to the depreciable property.
Note
We consider you to acquire the land for an amount equal to the FMV when you changed its use.
Selling your rental property
If you sell a rental property for more than it cost, you may have a capital gain.
List the dispositions of all your rental properties on Schedule 3, Capital Gains (or Losses).
If you are a partner in a partnership that has a capital gain, the partnership will allocate part of that gain to you. The gain will show on the partnership's financial statements or in box 151 of your Slip T5013, Statement of Partnership Income. Report the gain at line 174 of Schedule 3.
Note
You cannot have a capital loss when you sell depreciable property. However, you can have a terminal loss.
Replacement property
In a few cases, you can postpone or defer including a capital gain or recapture in income. For example, your rental property might be stolen, destroyed, or expropriated, and you replace it with a similar one.
You can also defer a capital gain or recapture of CCA when you transfer rental property to a corporation or a partnership.
Forms and publications
- Guide T4036, Rental Income
- Form T776, Statement of Real Estate Rentals
- Interpretation Bulletin IT-291, Transfer of Property to a Corporation Under Subsection 85(1)
- Interpretation Bulletin IT-378, Winding-up of a Partnership
- Interpretation Bulletin IT-413, Election by Members of a Partnership Under Subsection 97(2)
- Information Circular IC76-19, Transfer of Property to a Corporation Under Section 85
- Interpretation Bulletin IT-273, Government Assistance - General Comments
- Folio S3-F4-C1, General Discussion of Capital Cost Allowance
- Income Tax Folio S1-F5-C1, Related Persons and Dealing at Arm's length
- Guide T4037, Capital Gains
- Schedule 3, Capital Gains (or Losses)
- Slip T5013, Statement of Partnership Income
Related topics
- Date modified:
- 2017-01-03