CCA Exemption in Income Tax: Rates, Half-Year Rule, and Recapture

Capital Cost Allowance in Canadian income tax is the deduction that lets you write off the cost of a business or rental asset gradually over several years instead of all at once. Under the Income Tax Act, each depreciable asset you buy is assigned to a class in Schedule II of the Income Tax Regulations, and each class has its own rate that caps how much you can deduct against the class balance every year.¹ The claim is voluntary: you can take any amount from zero up to the maximum, so you can time deductions for the years they help most.

What Qualifies for CCA

The asset has to be depreciable property used to earn business or rental income. Buildings, machinery, office furniture, and vehicles all qualify, and so do certain intangibles like patents and limited-term franchises.

You cannot claim CCA on most land or on living things such as trees, shrubs, or animals. Timber limits, cutting rights, and wood assets are the exception.² When you buy a property that includes both a building and land, split the purchase price and put only the building portion into a class.

Common Classes and Rates

The class you use decides everything downstream. These are the ones most claimants encounter:

Class 1 (4%): buildings and their component parts, including wiring, plumbing, heating and cooling systems, elevators, and lighting.¹
Class 8 (20%): office furniture, appliances, tools costing $500 or more, and other tangible property not assigned elsewhere.
Class 10 (30%): passenger vehicles at or below the prescribed cost limit, plus vans, trucks, and general-purpose automotive equipment.
Class 10.1 (30%): passenger vehicles that exceed the prescribed ceiling. For vehicles acquired on or after January 1, 2026, that ceiling is $39,000 before tax, and each vehicle sits in its own separate class.³
Class 54 (30%) and Class 55 (40%): zero-emission vehicles. Class 54 covers zero-emission passenger vehicles with a capital cost limit of $61,000 plus sales tax.⁴

Most classes use the declining-balance method. You apply the rate to whatever undepreciated balance is left in the class, not to the original purchase price, so the deduction naturally gets smaller each year you claim it.⁵

How to Calculate Your Claim

Every CCA calculation starts with the Undepreciated Capital Cost of the class. The UCC is the running balance: original cost of everything in the class, minus every CCA deduction claimed in prior years, minus the proceeds from anything sold. If it is your first year in the class, the UCC is simply what you paid for the asset.⁶

You also need to know when the asset became available for use. CCA claims cannot start until the property is ready to perform its intended business function.⁷ Equipment sitting in a warehouse waiting to be installed is not yet available for use.

The math itself is straightforward. Multiply the adjusted UCC (after the half-year rule or accelerated incentive adjustment) by the class rate. That gives you the maximum claim for the year. You can claim less, or nothing at all. Anything you don’t claim stays in the UCC and carries forward indefinitely for use in a future year.⁸

The Half-Year Rule

In the year you add a new asset to a class, the half-year rule normally limits you to claiming depreciation on only half of the net addition, meaning new purchases minus any dispositions in the same class. The reasoning is that on average an asset is not in service for the full year it is acquired.⁵ Without it, someone could buy expensive equipment on December 30 and claim a full year’s depreciation two days later.

The rule has exceptions. Property that qualifies for the Accelerated Investment Incentive gets different first-year treatment, and zero-emission vehicle classes 54, 55, and 56 have their own enhanced first-year rules that replace the standard restriction.⁴

Accelerated Investment Incentive

For property acquired after November 20, 2018, and available for use before 2028, the Accelerated Investment Incentive gives a larger first-year deduction than the standard rules would allow. It effectively suspends the half-year rule and replaces it with a multiplier.⁹

The incentive is now in phase-out. For eligible property that becomes available for use between 2024 and 2027:

Property normally subject to the half-year rule: the first-year allowance is two times the normal first-year CCA. In effect, the half-year rule is suspended and you calculate CCA at the full class rate on the entire net addition.
Property not normally subject to the half-year rule: the first-year allowance is one-and-a-quarter times the normal first-year deduction.

The AII does not apply to Classes 54, 55, 56, 43.1, 43.2, or 53, which have their own enhanced first-year rules.

Zero-Emission Vehicles

Zero-emission vehicles follow a separate enhanced first-year schedule. For a Class 54 zero-emission passenger vehicle available for use after 2025 and before 2028, the enhanced first-year rate is 55%. The phase-down runs:

Before 2024: 100% first-year write-off.
2024 and 2025: 75%.
2026 and 2027: 55%.

After the enhanced first-year deduction, any remaining balance depreciates at the regular class rate on a declining-balance basis.⁴

Restrictions to Watch

The most important restriction for landlords is that CCA cannot be used to create or increase a net rental loss. Before claiming CCA on a rental property, calculate whether all your rental properties combined are producing net income for the year. If the result is already a loss, or would become one after the deduction, you cannot claim CCA on the buildings or associated appliances.⁵ This restriction applies to rental income only, not business income.

CCA on Class 10.1 passenger vehicles is capped at the prescribed ceiling regardless of what you actually paid. For 2026 that ceiling is $39,000.³ Spend $60,000 on a passenger vehicle, and only $39,000 (plus applicable sales tax) enters the class for depreciation.

Where to Report It

If you are self-employed, calculate CCA in Area A of Form T2125, Statement of Business or Professional Activities. The final amount goes on line 9936.¹⁰

If you earn rental income, use Form T776, Statement of Real Estate Rentals.¹¹ Both forms follow the same steps: enter the opening UCC for each class, add new purchases, subtract dispositions, apply the half-year rule or accelerated adjustment, and calculate the claim. The deduction then flows through to your T1 General.

Selling an Asset: Recapture and Terminal Loss

Disposing of a depreciable asset does more than remove it from the class. It can trigger one of two adjustments.

Recapture

Recapture happens when sale proceeds push the UCC of the class below zero. A negative UCC means you claimed more CCA over the years than the asset actually depreciated, so section 13(1) of the Income Tax Act adds the excess back to your income.¹² You are repaying the earlier tax benefit. Report it on line 8230 for business income.⁸

Terminal Loss

Terminal loss is the reverse. If you dispose of every asset in a class and a positive UCC balance remains, you under-claimed CCA relative to the asset’s actual decline in value. Section 20(16) lets you deduct that leftover balance as a terminal loss in the year you disposed of the last asset in the class, which clears the class to zero.¹²⁸

Keep detailed records of sale prices and disposal dates for every depreciable asset. These adjustments are where CRA audits tend to focus, and reconstructing the numbers after the fact is much harder than tracking them as you go.

1
Justice Laws Website. Income Tax Regulations (C.R.C., c. 945) – Schedule II
2
Canada.ca. Basic Information About Capital Cost Allowance (CCA)
3
Department of Finance Canada. Government Announces the 2026 Automobile Deduction Limits and Expense Benefit Rates for Businesses
4
Canada.ca. Classes of Depreciable Property
5
Canada Revenue Agency. Amount of Capital Cost Allowance You Can Claim
6
Canada Revenue Agency. Column 7 – Undepreciated Capital Cost After Additions and Dispositions
7
Canada Revenue Agency. Available for Use Rules
8
Canada.ca. Self-employed Business, Professional, Commission, Farming, and Fishing Income: Chapter 4 – Capital Cost Allowance
9
Canada.ca. Accelerated Investment Incentive
10
Canada Revenue Agency. Area A – Calculation of Capital Cost Allowance (CCA) Claim
11
Canada Revenue Agency. Completing Form T776, Statement of Real Estate Rentals
12
Justice Laws Website. Income Tax Act – Section 13