CAPITAL GAINS/DEPRECIATION (CAPITAL COST ALLOWANCE) ON RENTAL PROPERTIES:
Taxation is a very important topic in real estate investing.
Revenue Canada allows buildings, but not land, to be depreciated usually at 4% on a declining balance method. These are included in Class 1 on the tax return (either the T776 statement of rentals on the personal tax return or on the T2 if held in a corporation). This means that for example if your property was purchased for $200,000, you would be allowed to deduct approximately $8,000 on a declining basis i.e. on the remaining balance after deducting the CCA that has already been claimed. Most tax software will calculate this for you automatically.
It is important to ensure that you add any capital costs eg. welcome taxes, improvements to the land or building and other items that are not expensed to ensure that the proper cost is reflected. There is however a special restriction – if you sell your property for more than the cost you are subject to CCA recapture. This means that the full amount of the CCA deduction claimed will become taxable upon sale of the property, which is often the case as properties tend to appreciate in value. The balance of the gain will be classified as a capital gain and as such only 50% is taxable at your marginal tax rate. For example: if you purchased your building at $200,000, claimed $15,000 in depreciation and sold it for $250,000, then the additions to your taxable income will be the full $15,000 for the CCA + $25,000 which is half of the remaining $50,000 gain. This is important to know for property owners as it can result in significant tax consequences if you have depreciated a building over a few years.
Some of the above content are extracted from the website cited below:
https://www.montrealfinancial.ca/blog/are-you-ready-for-real-estate-moguldom-the-business-and-tax.html
The Story of a Real Estate Investor 