CCA Recapture and Terminal Loss When You Sell

For years, you deducted part of the cost of your trailer, your computer or your tools. Then you sell the asset. The Canada Revenue Agency now runs one last calculation: it compares what you deducted against what the asset was really worth when you sold it. Depending on the result, an amount comes back into your income, or one last amount comes out of it.

The class balance: what is left to depreciate

A long-lasting asset is not deducted all at once. Its cost is spread over several years, and that is the capital cost allowance (CCA). If the mechanism is new to you, start with our introduction to CCA; what follows assumes you have it.

Your assets are not tracked one by one. They are grouped into classes, each with its own rate: Class 8 at 20% covers furniture, machinery and tools costing $500 or more, and Class 50 at 55% covers computer equipment.

CCA is calculated using the declining balance method: the rate applies each year to the balance that is left, not to the original purchase price. That balance has a name in tax jargon, the undepreciated capital cost, or UCC. Just hold on to the idea: it is what you still have left to depreciate in that class.

On a sale, you take out the lesser of two amounts

Here is the point almost everyone misses. When you sell, you do not take the sale price out of the balance. The CRA's T4002 guide sets the rule: you take out the lesser of two amounts, either the proceeds of disposition minus any expenses related to the sale, or the capital cost of the asset, meaning what you paid for it.

In other words, you can never take out of a class more than the asset brought into it. Once that subtraction is done, only two situations are possible.

Recapture: part of your CCA comes back into your income

You have a recapture when the sale price is more than the class balance at the start of the year, plus the cost of any assets bought during the year. The balance then turns negative.

What this means in plain terms: you depreciated the asset faster than it actually lost value. The sale reveals it, and the gap goes back into your business income for the year. It is reported on line 8230, the one for business and professional income.

A worked example

You buy a trailer for $10,000 and put it in Class 8. After a few years of CCA, the balance of that class has come down to $4,000. You sell the trailer for $6,000, and you have no other Class 8 assets left.

You take out of the balance the lesser of the sale price ($6,000) and the purchase price ($10,000), so $6,000:

• balance before the sale: $4,000
• less the amount taken out: $6,000
• balance after the sale: −$2,000

The balance is negative by $2,000. That is a recapture of $2,000, and it is added to your business income.

What recapture actually costs

Recapture is added to your business income, and it is taxed like the rest of it. The rate that applies to it is your marginal rate, meaning the percentage of tax that hits your last dollar of income, not the average across all your income.

In Quebec, two income taxes stack: the federal one and the provincial one. So it is the combined marginal rate of the two that matters. On a taxable income of around $60,000, our Quebec calculator puts it at around 36%. On the $2,000 recapture in the example, that works out to roughly $720 more tax for the year.

Terminal loss: the CCA you still had left to take

This is the opposite situation, and it works in your favour. The T4002 guide defines it this way: you may have a terminal loss when, at the end of a fiscal period, there is no longer any property in the class, but there is still an amount you have not deducted as CCA.

Two conditions, and both have to be met:

• the class is empty, meaning you no longer own any asset that belongs to it;
• a balance is left that you have not yet deducted.

The terminal loss is then deducted in full, on line 9270, on the business expense side.

Back to the trailer. The class balance is still $4,000, but this time you sell it for $1,500. You take $1,500 out of the balance, $2,500 is left undepreciated, and no asset remains in the class: that is a terminal loss of $2,500.

The word "terminal" says it all. The CCA you had not yet taken, you take all at once, and the class account is settled.

The trap of the class that is not empty

This is the condition that catches people out most often. If you own a second trailer, a filing cabinet or a machine that belongs to the same class, that class is not empty. So no terminal loss, even if you sold at a loss.

Nothing is lost for all that: the undepreciated balance stays in the class and keeps producing CCA in later years. It is simply spread out instead of being deducted right away.

Selling for more than the asset cost you

This happens more often than people think: a well-maintained vehicle, a tool that has become hard to find. Two things then happen at the same time.

First, the lesser-of-two-amounts rule caps what comes out of the balance at the purchase price. So all the CCA deducted since the purchase comes back into your income as recapture.

Second, the part of the price above the purchase price is a capital gain. It does not go through the class balance: it is reported separately, under its own rules.

One last time with the trailer, bought for $10,000, with a balance of $4,000, and sold this time for $12,000. You take out of the balance the lesser of $12,000 and $10,000, so $10,000: the balance drops to −$6,000, a recapture of $6,000, which is exactly all the CCA deducted since the purchase. The $2,000 above the purchase price is a capital gain.

The reverse, however, does not exist. The CRA is explicit: you cannot have a capital loss when you sell depreciable property. You may have a terminal loss, and that is the only form a loss takes on this kind of asset.

Two cases where these rules do not apply

The Class 10.1 passenger vehicle. The T4002 guide sets both rules aside at once: neither recapture nor terminal loss applies to passenger vehicles in that class, except for certain assets covered by immediate expensing. So selling such a car creates neither extra income nor a last-minute deduction. Our article on Class 10 versus Class 10.1 explains which car falls on which side.

Land. Land does not lose value in the eyes of the tax authorities, and the guide says so plainly: you cannot claim CCA on land. No CCA means no balance to settle, and so neither recapture nor terminal loss when you resell. A building sold together with its land therefore means splitting the two in the contract.

What to check before you sell

Four habits, worth taking before you sign rather than when you file.

1. Look at the class balance before you set a price. It is the balance, not the original purchase price, that decides whether the sale produces a recapture or a terminal loss.
2. Check whether the class will be empty after the sale. That is the condition for a terminal loss, and a single other asset in the same class is enough to make it disappear.
3. Remember that your past choices count. Every year you claimed the maximum reduced the balance by that much, which makes a recapture more likely. That is one of the arguments in our article on CCA being optional.
4. Keep the purchase invoice. The purchase price caps the amount taken out of the balance, and it is what separates recapture from a capital gain.

This article explains a general mechanism; it does not replace advice from an accountant who knows your file.