This is a very interesting request because it gives me a
chance to expound.
I have rewritten your question into five parts.
1. CCA (Capital cost Allowance) is a
means by which an individual or corporate taxpayer can deduct the decrease in
value of a capital asset. A Capital Asset is a hard good which could be
a stove, a car, a jet engine, a sewing machine, a driveway, a movie, a video,
a fence, tools, a computer, a satellite dish orr a building. The rate of CCA
(which most people refer to as depreciation) varies for different types of
capital assets.
Thus, if you rented a commercial office space which
included a fridge, stove and computer, you could claim CCA on the fridge and
stove at 20%, the computer at 30% and the building at 4%.
When the building is rented, you cannot use a
depreciation amount to create a loss. If the building was your own
office for an operating business and you had a bad year, you "could" use the
depreciation to increase the loss and deduct it against other sources of
income.
2. With a building in a rising or
constant market, depreciation is just a tax deferral scheme. When you
sell it, you must "recapture" the depreciation first. Should you claim
it when you just have to pay it back later is the next question? The
answer is that if you see the benefit of an RRSP and bought one, you will
also claim CCA on your rental. In the case of the fridge, stove,
computer, and gravel truck, claiming the CCA is ALWAYS a benefit because
these items ALWAYS end up being worth nothing at some point and there is
rarely any recapture of CCA (depreciation).
And, if you calculate in the present value of the tax
saved in your pocket versus the paying back of the tax twenty years from now,
it is ALWAYS beneficial to claim now.
An occassional exception might be where you have a very
low taxable income this year and only save 22% and then sell the building
next year, creating a high taxable income and having to pay back the tax at
45%. However, the same principal applies here to RRSP's and any other
tax deferral scheme.
3. NO and yes! When you save tax
by claiming CCA, you are saving tax at TWICE the amount you would have to pay
it back on a Capital Gain. That is GOOD! Again, it is a matter of
timing as I explained at the end of the last paragraph.
4. Yes - it is usually better to take
the CCA, subject to timing as explained above. ALWAYS better in the
long term. Maybe not, if you are selling the building in the next two
years. ALSO You would NEVER claim CCA if it is not needed to lower your
tax THIS year.
5. Yes, you can deduct advertising for
rent, interest on the mortgage, property taxes, property management,
landscaping, legal costs to draw up a lease and other routine operating
expenses.
You CAN NOT deduct the cost of remodeling, putting on a
new roof, adding a suite or the legal costs to buy the property. These
items get added to the Adjusted Cost Base of the building and you get to
claim CCA on them at 4% per year on the diminishing balance. Also, in the
first year of "any" addition, you can only claim 1/2 of the CCA allowable.
Therefore if your building had $10,000 worth of
appliances (that fall into Class 8 AT 20%), you would claim 10% the first
year or $1,000 and have $9,000 left to depreciate. The second year you
would claim 20% of $9,000 and have $7,200 to depreciate in the third year. In
the third year you would claim 20% of $7,200 (1,440) and have $5,760 left to
depreciate, etc., etc.
6. The above applies to Canada where
you cannot use depreciation to create a loss and you can claim it or not as
you decide.
In the United States, the rates vary as well but you
MUST / HAVE TO claim it whether you want to or not (there is one little tiny
exception in "six states" where you do not have to claim if it is your
personal house and rented on a very temporary basis) AND you can create a
rental loss provided the total rental losses do not exceed $25,000, etc.,
etc.
Hope this helps.
david ingram -
www.centa.com
108-100 Park Royal South
West Vancouver, BC, CANADA, V7T 1A2
(604) 913-9133 - Fax (604) 913-9123
cell (604) 657-8451 (10 AM to 10 PM 7 days)
US / CANADA Income Tax and Working Visa Matters
