Recapture of capital cost allowance is the amount, under ITA s. 13(1), included in a vendor's income for the year when the total capital cost allowance previously claimed on a class of depreciable property turns out to have been more than the property actually depreciated in value — it is fully taxable as ordinary income, not a capital gain.
ITA s. 13(1) states that where the amounts that reduce a class’s undepreciated capital cost (proceeds of disposition and similar credits) exceed the amounts that build it up (unclaimed capital cost), “the excess shall be included in computing the taxpayer’s income of the year.” In practice: a piece of equipment or a building is sold for more than the UCC pool has left in it, and the CCA the vendor deducted in earlier years — sheltering income that turned out not to have actually declined — gets clawed back. Recapture is capped at the property’s original capital cost; any amount realized above that original cost is a capital gain instead, taxed at the ½ inclusion rate rather than as fully taxable income.
Treadstone Law’s guidance on selling a depreciated rental property describes the identical mechanic in that specific asset class: “when you sell the property, if your proceeds allocated to the building exceed the remaining UCC, the difference is recaptured CCA. Recapture is fully taxable as ordinary income in the year of sale — it is not treated as a capital gain,” and that “a sale can produce both recapture (taxed fully) and a capital gain (taxed at the inclusion rate) — these are separate calculations.” The same UCC-versus-proceeds arithmetic applies to any depreciable class, not only real property, which is exactly why a buyer’s tax diligence recomputes recapture exposure class by class rather than accepting the target’s book depreciation schedule at face value.
A target’s Class 8 equipment pool has an undepreciated capital cost of $340,000 and an original capital cost of $500,000. The asset purchase agreement allocates $420,000 to that class. Because $420,000 exceeds the $340,000 UCC but stays under the $500,000 original cost, the entire $80,000 difference is recapture — fully taxable as ordinary income to the vendor in the year of sale. Had the parties instead allocated $520,000 to the same class, the vendor would face $160,000 of recapture (capped at the $500,000 original cost less $340,000 UCC) plus a separate $20,000 capital gain on the amount above original cost — two different tax results from two different price-allocation choices on the same asset.
See also: Terminal loss · Purchase price allocation · Section 167 GST/HST election.
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