Recapture of CCA

Definition

Recapture of CCA is the rule in Income Tax Act s.13(1) that brings previously deducted CCA back into income when the undepreciated capital cost (UCC) of a class falls below zero at the end of a tax year. The mechanism prevents a taxpayer from sheltering ordinary income with depreciation that proves, in hindsight, excessive because the asset was sold for more than its remaining tax value.

Key rules

• Computation: at year end, after additions and dispositions are netted, if the UCC of a class is negative, the absolute value is included in income as recapture (s.13(1)). The UCC is then reset to zero going into the next year.
• Dispositions reduce UCC by the lesser of proceeds of disposition and capital cost (s.13(21)). This cap prevents disposing of a $10,000 asset for $15,000 and pulling $15,000 out of the UCC pool; only the $10,000 original cost reduces UCC, and the $5,000 excess is treated as a capital gain.
• A capital gain is possible alongside recapture: when proceeds exceed capital cost, the portion above cost is a capital gain (taxable at the inclusion rate), and the portion up to cost triggers recapture to the extent it pushes UCC negative.
• Recapture is always ordinary income, taxed at the corporation's full rate, not the capital-gains rate. It also feeds back into the Schedule 1 additions.
• Class 10.1 does not trigger recapture. The class ends with half-year CCA in the year of disposition and no further adjustment (Regulation 1100(2.5)).
• Involuntary dispositions (theft, expropriation) may allow election under s.13(4) to defer recapture by reinvesting in replacement property.

Example

A BC corporation's Class 8 UCC is $1,500 on January 1, 2026. It sells a set of old desks for $4,000. Original cost of the desks was $6,000. No additions in 2026.

1. Reduction to UCC = lesser of $4,000 (proceeds) and $6,000 (cost) = $4,000.
2. End-of-year UCC (before recapture) = $1,500 − $4,000 = −$2,500.
3. Recapture = $2,500, included in 2026 income on Schedule 8 and flowing to Schedule 1.
4. UCC reset to $0 going into 2027.

If the desks had been sold for $7,500 instead:

1. Reduction to UCC = lesser of $7,500 and $6,000 = $6,000.
2. End-of-year UCC = $1,500 − $6,000 = −$4,500. Recapture = $4,500.
3. Capital gain = $7,500 − $6,000 = $1,500. Taxable at 50% inclusion (confirm 2026 inclusion rate post-policy update), so $750 taxable capital gain.

Common mistakes

• Using proceeds instead of the lesser of proceeds and cost when reducing UCC. The cap prevents over-reduction and avoids inflating recapture.
• Treating recapture as a capital gain. It is ordinary income and is not eligible for the capital gains inclusion rate.
• Adding the capital gain to the recapture and double-counting. Capital gain applies only to the excess of proceeds over cost and is separate from recapture.
• Forgetting to reset UCC to zero. A residual negative UCC carried forward becomes a perennial filing error.
• Applying recapture to Class 10.1 disposals. The class is exempt.

Related concepts

Recapture is the mirror image of terminal loss, arising when the class ends the year with a positive UCC and no remaining assets. Both are part of the broader CCA framework and interact with the half-year rule on re-acquisitions in the same class.