It is common for taxpayers to own rental properties as an investment rather than as a business. In general, a taxpayer can claim a deduction for depreciation of the cost of the rental property (other than the cost of the land), when calculating income for tax purposes.
However, except for a corporation whose principal business throughout the year is the leasing or rental of real property that it owns, the tax depreciation (capital cost allowance — CCA) claimed against rental income cannot be used to create or increase a loss from the renting or leasing activities. This restriction applies even if the taxpayer earns the rental income through a partnership.
Many taxpayers do not realize that this restriction is applied on an aggregate basis, rather than applying to each property.
For example, assume X has two rental properties, A and B. Property A has income of $100 after CCA, and Property B has a loss of $40 before CCA. In this example, X can claim CCA on Property B, even though it has a loss, because the total rental income from Properties A and B is $60. X can claim up to $60 of CCA on Property B, to increase its loss to $100. If X believes that the restriction applies to each property, X will lose out on claiming $60 of available losses for the year.
As noted above, there is no CCA restriction if the taxpayer is a corporation whose principal business, throughout the taxation year, is the leasing or rental of real property that it owns. If the rental business is carried on through a partnership, the same exception applies if all members are corporations whose principal business is the leasing or rental of real property.
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