Is it worth claiming depreciation in Canada?

Question

Every Podcast tells me the answer is yes, however every time I talk to my accountant he says that depreciation isn't always worth claiming. He mentions that when you go to sell the property or if you pass away your kids will have to pay the depreciation recapture. Basically cancelling out any benefit it has. Am I missing something, or is there a follow up question I should be thinking about?

Thanks in advance,

Warren

Thanks in advance,

Warren

Warren Marshall · Answer

Follow up post for who ever finds this down the road:

Positives of Depreciation:

TVM - Time value of Money   I originally thought of the depreciation expense as profit/cash flow.   However it is more like interest free borrowed money.   To benefit from depreciation the most you must reinvest the depreciated amount and hold off selling the property until you are net positive.

What I still haven't figure out yet:

- What holding period length is the minimum in order to reap the rewards?  (my assumption is 5+ but really not sure)

-Not sure how to calculate the recapture amount yet.  Haven't found a good calculator or formula.

-Would like to know if anyone has invested their depreciation expense into an investment account (ETF for example) every year and pulled out what was needed to pay recapture and Capital gains at the end..?

Helpful Link:

I found this podcast by REI Mastermind really interesting about Accelerated depreciation and Cost Segregation Studies.  Worth a listen if interested but not sure if it's completely applicable in Canada.

https://podcasts.apple.com/ca/...

Melanie Dupuis · Answer

@Warren Marshall We are currently liquidating some of our assets here in Ontario, to deploy them cross border. So we are receiving less money today. However, like you mentioned all those years that we used depreciation was like an interest free loan, which we utilized to purchase other income producing assets. I wouldn't change a thing!!!

Melanie Dupuis · Answer

We always claim the maximum amount of depreciation to reduce the income that CRA can tax. This way we have more money in our pockets today. Instead of giving it to the government, we utilize these funds to keep growing and bettering our portfolio. I would rather have more money now and invest it. When we sell down the road, the recapture will come off my overall profit.

Jonny Van Dyck · Answer

Thanks for posting, I have the same question. I've heard not to claim it unless you are definitely holding the property for the long haul … absolutely no plans to sell. One part I'm unclear on is that I've heard the recapture can be substantially more than the tax benefits received. Particularly in the case where the property has appreciated substantially (like a lot of our properties have, in Canada). If it was simply that you have to repay what you received, then the answer would be pretty simple: a dollar in your pocket today is better than tomorrow, so you might as well claim it so long as you are fully prepared to pay it all back upon selling.

I would love if an accountant would chime in. For example, let's say you purchased a rental property 10 years ago for $500k and have claimed max CCA (depreciated) for the property each year. Today the property is worth $900k and you want to sell it. Let's say the refund you got was $2500 each year for the depreciation expense. How much would the CCA recapture be?

I would love if an accountant would chime in. For example, let's say you purchased a rental property 10 years ago for $500k and have claimed max CCA (depreciated) for the property each year. Today the property is worth $900k and you want to sell it.  Let's say the refund you got was $2500 each year for the depreciation expense.  How much would the CCA recapture be?

Sebastian P. · Answer

US vs Canada advice is very different for this topic. USA has 1031 tax deferred exchange, which effectively means you never need to recapture. Canada doesn't have this rule, so you have to pay back the money when you sell.

IMO in with a hyper inflationary forecast for the next 25 years, I think the erosion of inflation will become a great help to debtors.

Lets say if you sold your property and had claimed 400k over the years. You must now recapture the CCA you claimed.

This occurs as 400k added to your income tax filing for the year, which is taxed at your marginal rate.

So 50% of 400k = 200k.

The present value of 200k 30 years in the future (with 5% inflation) is 46k in purchasing power.

PV = (1/(1.05^30))*200,000= ~46k.The time value of money eats away > 75% of your debt obligation is eroded.

The money you have to pay back can only buy 46k of goods.

Unless I'm completely misunderstanding things :)

Oren K. · Answer

@Warren Marshall In calculating the recapture, the sale price has nothing (formally) to do with it. It is the depreciated value deducted from the original purchase price (all in - Legals, Closing, Lenders fees, etc.).

Yes - Generally segregation is only done on 'larger' properties but there is no firm size. It becomes a cost / benefit analysis as it costs $X to get it done and it provides a benefit $Y. If it is only marginally positive, a lot of people skip it as not worth their effort. I'm surprised that you can't find someone.

Oren

Warren Marshall · Answer

Thanks Oren,

to clarify, is the recapture amount based on your original purchase price or your sale price?   Secondly, assuming you depreciate your rentals have you done any cost segregation studies?   I cant seem to find anyone local who does, it sounds like its worth it with larger buildings but I want to make sure its still applicable in Canada.

Thanks in advance,

Warren

Oren K. · Answer

@Warren Marshall

I don't believe there is a minimum or ideal time that gives you the best 'benefits'.

Calculating the recapture amount is fairly straight forward;

Original Purchase Price - Current Depreciated Value = Recapture Amount

Your accountant should be able to provide you with the #'s very easily.

As an example;

Purchase an office building for $1,000,000. Over several years the depreciated value becomes $850,000. Recapture amount is $150,000.

As noted in other responses, you received the benefit of NOT paying taxes on the $150,000 over the years so now it is time for CRA to 'catch up'. The marginal rate used should be the same, unless the law has changed, in both cases so that's a wash but as you mentioned above, you had the use of the money not paid in taxes over the years.

A couple of notes to also consider;

- Some expenses (e.g. new HVAC, computer) also have their own depreciation schedules. These items are NOT subject to recapture as they generally have fixed / short life time.

- Land is NOT subject to depreciation so if when you purchased the property and 25% (relatively common allocation) was put to the lands value ($250,000 in the example above) it is considered to have the same value at sale.

Hope this helps.

Oren

Roy Cleeves · Answer

I have gone the opposite way and NOT claimed the depreciation on my single family homes.  And that is really because at some point I will liquidate my single family homes and redeploy the money into something Multifamily much bigger.

Seems to be benefits both ways and yes, a tax accountant that could explain how the recapture is calculated would really help sort this out.

Warren Marshall · Answer

@Melanie Dupuis  I appreciate that point of view.  That helps a lot, just gotta make sure that I invest the depreciation benefit so that at the end I'm ahead of the game vs scrambling to pay off the extra expense.  Am I right by saying Its almost like having an interest free loan that has to be paid off at the time of the house sale?

Really appreciate the feedback

Is it worth claiming depreciation in Canada?

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