Recapture of Capital Cost Allowance (CCA)

Definition

CCA recapture happens when a depreciable asset (equipment, vehicle, building, machinery) is sold for more than its undepreciated capital cost (UCC). Over the years, your corporation has deducted capital cost allowance (CCA) on these assets, reducing their tax book value.

In French-language Quebec documentation, you’ll see récupération d’amortissement used for the same concept.

If the sale price exceeds that reduced value, the CRA considers that the prior deductions were too generous — and recaptures the difference.

The key point: this recapture is taxed at the ordinary business income rate, not at the preferential capital gains rate. For a seller expecting to pay tax on a capital gain, the bill can be significantly higher than anticipated.

Why CCA recapture matters in a business sale

In an asset sale, each asset sold is treated separately for tax purposes. If your business owns equipment that originally cost $500,000 and whose UCC has fallen to $150,000 after years of CCA, a sale at $400,000 triggers a recapture of $250,000 ($400,000 minus $150,000).

That $250,000 is taxed as business income — at the combined federal-provincial rate, which can exceed 26% for a Quebec SME. If the sale price exceeds the original cost ($500,000), the excess portion is then treated as a capital gain.

This is one of the reasons sellers generally prefer a share sale to an asset sale. In a share sale, it’s the corporation itself that continues to hold the depreciable assets — there’s no individual disposition of assets, so no recapture.

Your gain is entirely treated as a capital gain on the shares.

Purchase price allocation across asset categories therefore becomes a major negotiation issue. The buyer wants to allocate more to depreciable assets (to maximize their future deductions), while you want to minimize the portion allocated to assets with low UCC.

This tension sits at the heart of every asset sale negotiation.

What every seller should know

• CCA recapture is taxed as ordinary income, not as a capital gain. The tax rate is therefore higher, and the Lifetime Capital Gains Exemption doesn’t apply to this portion.
• In an asset sale, ask your accountant to produce a detailed UCC schedule by asset class before starting negotiations. You need to know the tax impact of each allocation scenario.
• The price allocation across assets must be agreed in writing in the purchase and sale agreement. Otherwise, the CRA can impose its own allocation.
• If the potential recapture is significant, consider an alternative transaction structure — share sale or hybrid sale — to reduce the overall tax impact.

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This content is informational. Consult a tax specialist for your specific situation.