# Condo and Capital Cost Allowance - How to determine cost basis for depreciation



## jaxtayler

Hi, 

I am trying to determine cost basis for our condo which we started to rent out for depreciation purposes:


 Condo was purchased in 2012 June for the $500K
 Lived in the Condo for one year and moved out in June 2013. We had the condo assessed and it had appreciated to $550K.
 We started renting it out in July 2013, and it has been rented out to date.
 The condo does have a parking space in the garage, and it does not have a balcony or dedicated front/back year associated with it. 
 The building does have common landscaped courtyard.
 The local company that assess the property for the city to determine property taxes states that there is no land value associated with the condo. At least this is what is stated in the official assessment statement.

Now my question is does the condo have land value for CCA purposes? I have spoken to various people on this and I am have conflicting responses.

- I called CRA three times and each time was transferred to the rental department, on all three occasions they stated that there is no land value and that I can consider the whole cost to be depreciate able (including the parking spot). My cost basis would be 550K, because that was the value when we converted the property to a rental. ( We are non-residents so we will not be electing to make a subsection 45(2) claim).
- I talked to a local accountant in Halifax, NS and they also mentioned I should be able to depreciate the whole cost since there wouldn't be land value. 
- Since I live in the US I have cross-border filing requirements and have hired a very expensive cross-border accountant (unfortunately), and they are saying that I should allocate a certain % to land and not use to whole value of the property as my cost basis for CCA purposes. The accountant has referred me to IT-304R2 (http://www.cra-arc.gc.ca/E/pub/tp/it304r2/it304r2-e.html) Section 2c and 6.

I contacted the CRA one more time and pointed them to this bulletin and they still said I should be able to claim the whole amount in my cost basis for CCA.

Anyone have any experience with establishing cost basis on a Condo in Canada, and if there was no dedicated land associated with your unit, did still subtract land value from your cost basis for CCA purposes? 

Thanks


----------



## Numbersman61

jaxtayler said:


> Hi,
> 
> I am trying to determine cost basis for our condo which we started to rent out for depreciation purposes:
> 
> 
> Condo was purchased in 2012 June for the $500K
> Lived in the Condo for one year and moved out in June 2013. We had the condo assessed and it had appreciated to $550K.
> We started renting it out in July 2013, and it has been rented out to date.
> The condo does have a parking space in the garage, and it does not have a balcony or dedicated front/back year associated with it.
> The building does have common landscaped courtyard.
> The local company that assess the property for the city to determine property taxes states that there is no land value associated with the condo. At least this is what is stated in the official assessment statement.
> 
> Now my question is does the condo have land value for CCA purposes? I have spoken to various people on this and I am have conflicting responses.
> 
> - I called CRA three times and each time was transferred to the rental department, on all three occasions they stated that there is no land value and that I can consider the whole cost to be depreciate able (including the parking spot). My cost basis would be 550K, because that was the value when we converted the property to a rental. ( We are non-residents so we will not be electing to make a subsection 45(2) claim).
> - I talked to a local accountant in Halifax, NS and they also mentioned I should be able to depreciate the whole cost since there wouldn't be land value.
> - Since I live in the US I have cross-border filing requirements and have hired a very expensive cross-border accountant (unfortunately), and they are saying that I should allocate a certain % to land and not use to whole value of the property as my cost basis for CCA purposes. The accountant has referred me to IT-304R2 (http://www.cra-arc.gc.ca/E/pub/tp/it304r2/it304r2-e.html) Section 2c and 6.
> 
> I contacted the CRA one more time and pointed them to this bulletin and they still said I should be able to claim the whole amount in my cost basis for CCA.
> 
> Anyone have any experience with establishing cost basis on a Condo in Canada, and if there was no dedicated land associated with your unit, did still subtract land value from your cost basis for CCA purposes?
> 
> Thanks


You have to have allocate the cost to the various components - building, appliances, and common elements as per the CRA bulletin. The common elements include the land component which cannot be depreciated. The buildings and appliances fall into different CCA categories. It's unfortunate that CRA telephone staff are so misinformed about such a basic issue.


----------



## jaxtayler

Numbersman61 said:


> You have to have allocate the cost to the various components - building, appliances, and common elements as per the CRA bulletin. The common elements include the land component which cannot be depreciated. The buildings and appliances fall into different CCA categories. It's unfortunate that CRA telephone staff are so misinformed about such a basic issue.


Thank You. 

How do I go about determining the value between these components? The condo came with appliances etc so its all included in the price of the property.


----------



## CPA Candidate

There should be no land value. I would only include appliances in a different class if you purchased them new after buying the condo. Anything pre-existing just ignore. The amounts would be insignificant compared to the condo and the value hard to determine. For instance, what is the value of the parking space? You can't really come to any definite conclusion on that. The CCA rate difference is only 4% between building and parking lots, making for a rather insignificant difference.

Anyway, I'd also strongly suggest you do not claim CCA on rental property unless you want a large CCA recapture in the future. Do not claim CCA on anything that is not likely to actually depreciate.

For instance if you depreciated the condo from 550k to 450k over a number of years and then sold it for say, 600k, you'd have a 100k CCA recapture that would be included in income and subject to tax at a very high rate.


----------



## Numbersman61

CPA Candidate said:


> There should be no land value. I would only include appliances in a different class if you purchased them new after buying the condo. Anything pre-existing just ignore. The amounts would be insignificant compared to the condo and the value hard to determine. For instance, what is the value of the parking space? You can't really come to any definite conclusion on that. The CCA rate difference is only 4% between building and parking lots, making for a rather insignificant difference.
> 
> Anyway, I'd also strongly suggest you do not claim CCA on rental property unless you want a large CCA recapture in the future. Do not claim CCA on anything that is not likely to actually depreciate.
> 
> For instance if you depreciated the condo from 550k to 450k over a number of years and then sold it for say, 600k, you'd have a 100k CCA recapture that would be included in income and subject to tax at a very high rate.


CPA candidate, your answer on allocation is wrong and would result in a failing grade on your final exam. With regards to claiming CCA, there is a further complication since the original poster is a non-resident of Canada and so must claim depreciation on his US tax return. A non-resident of Canada owing rental property in Canada faces many tax challenges due to different tax regimes and often can get double taxed due to differing rules. There are a few books which explain the complications.


----------



## jaxtayler

Since depreciation is required in the US and can actually reduce actual earned income if a loss is created, it is recaptured at %25 which is less than my marginal tax rate. So it definitely makes sense to deffer the tax to a later date and get a reduced tax rate when you do actually capture. 

I just noticed that there is a federal surtax for non-residents which is %48 of the actual tax owing, so basically the first bracket is not 15% but 22.2% and so on. 

So I realized that I need to ensure I do not recapture depreciation at the second tax bracket which is 22% but 33% with the surtax, the limit is $43K. So I am going to look at paying the taxes in future years, but for now I have depreciation on appliances and some equipment I can take since they do not appreciate.

Since I have to recapture depreciation at 25% anyways in the US, any taxes I pay to Canada I can claim as a foreign tax credit , and would be required to pay the balance. So if recaptured $20K of depreciation I would owe Canada 22.2% tax and the remaining balance of 2.8% the US. However If I was in the second or later brackets I would pay Canada 33% or more, and since I am only required to pay the US 25% I would lose out on the 8% additional tax I paid out to Canada.


----------



## CPA Candidate

Numbersman61 said:


> CPA candidate, your answer on allocation is wrong and would result in a failing grade on your final exam.


Unless there is a deed that says X amount is on account of land, any allocation is completely arbitrary and without support, which is worse that just doing what the CRA suggests.

If the CRA says on three separate occasions there is no land value, what more confirmation do you need? He even mentioned the bulletin and they still didn't care.

Anyway, if the CRA and I am wrong, how would you determine the allocation?


----------



## Numbersman61

CPA Candidate said:


> Unless there is a deed that says X amount is on account of land, any allocation is completely arbitrary and without support, which is worse that just doing what the CRA suggests.
> 
> If the CRA says on three separate occasions there is no land value, what more confirmation do you need? He even mentioned the bulletin and they still didn't care.
> 
> Anyway, if the CRA and I am wrong, how would you determine the allocation?


The CRA bulletins explain that the allocation must be done- the CRA phone advisors are not the final authority and often are the source of misinformation. The allocation must be reasonable - I would review property tax assessment notices and periodic appraisals done for the condo corp for insurance purposes in order to assist in making a reasonable allocation. Some practitioners recommend a rule of thumb method of 10% allocated to land if more definitive info not available.


----------

