Change-in-Use Rules: Unpacking ITA Section 13(7) and its Impact on Capital Cost Allowance (CCA) in Canada

NOTE: We highly recommend you first read our article titled "Change-in-Use Rules under Section 45 – What Every Property Owner Needs to Know", as this is a higher level topic.

Here at Lakeshore, it is our duty to inform taxpayers and investors of the muddy waters that is Canadas Income Act. For this topic, it's our goal is to provide taxpayers and investors with practical guidance on navigating CCA shifts in depreciable property.

Subsection 13(7)

Capital Cost Allowance (CCA) is Canada's tax system's way of letting businesses deduct the "wear and tear" on depreciable assets like buildings, vehicles, or equipment over time. But what happens when an asset's use changes – say, you convert your personal cottage into a rental property, or flip a business building back to personal use?

Enter subsection 13(7) of the Income Tax Act (ITA), a powerhouse provision that deems fictional dispositions and acquisitions at fair market value (FMV) to recalibrate your CCA claims and the assets underlying undepreciated capital cost (UCC). This rule ensures the tax treatment aligns with the property's current purpose, preventing over- or under-claiming of depreciation. While it interacts closely with section 45 (general change-in-use for capital property), 13(7) zooms in on depreciable assets.

The Basics: What Does Section 13(7) Say?

Subsection 13(7) kicks in when depreciable property's use shifts between income-producing (business/rental) and non-income-producing (personal) purposes, or when the proportion of use changes. It deems a disposition (sale) and/or reacquisition to reset the capital cost basis for CCA as such:

1. Converting Personal Property to Rental/Business Use: Under Section 45 - when you convert from personal-use to income-use, you have an immediate deemed disposition on the property at FMV and an immediate re-acquisition at FMV thereafter.

   
   

   For the purposes of Subsection 13(7)(b), and UCC, you are deemed to re-acquire the property at the lesser of FMV or an adjusted cost (original cost + 1/2 of FMV excess over original cost, minus certain capital gains exemptions under s.110.6). This gives you your starting UCC and sets the basis for future CCA claims.

• Example: You buy a personal-use (primary residence) condo for $300K in 2023. In 2025, the condo is now worth $400k FMV and you decide to begin renting it out full-time.

  
  

  • For CCA purposes: Deemed acquired at lesser of $400K FMV or $300K + 1/2($400K - $300K) = $350K. CCA starts on $350K (Class 1, 4% rate). If partial rental use (50% rental), prorate under 13(7)(c) to $175K UCC.

2. Shifting Rental/Business Property to Personal Use: Under Section 45 - when you convert from income-use to personal-use, you have an immediate deemed disposition on the property at FMV and an immediate re-acquisition at FMV thereafter.

   
   

   This stops CCA claims going forward and may trigger recapture of prior CCA claims if UCC < FMV.

• Example: Your $400K rental building (UCC $300K after CCA, FMV $500K) becomes your home in 2026. You are now deemed to have sold at $600K and reacquired at $600K.

  
  

  • For CCA purposes: Since your starting UCC in 2025 was $350k, and your UCC at the time of sale was $300k, you will have $50k of recapture - added to your personal income for the tax year and taxed as ordinary income. The remainder ($600k - 400k = $200k gain) is taxed as a capital gain (50%). Total taxable income = $150k .. yikes!

3. Change in Proportion of Use: If income-use increases, deemed acquisition of the increased portion (1/2 of FMV excess over original cost); if decreases, deemed disposition of the decreased portion (may trigger recapture) – both at proportional FMV.

4. Non-Arm's Length Transfers: Subsection 13(7)(e) which deals with non-arms length transactions for UCC purposes, is an anti-avoidance rule that links the cost to the transferor's original cost or a deemed amount otherwise (it prevents overvaluation of related party transactions).

Common Pitfalls and Planning Tips

• Recapture Trap: Always calculate UCC before shifts – high FMV means big income hit.

• Principal Residence Overlap: Use s.45(2) or 45(3) elections to defer gains on home conversions, but CCA claims block full exemption on sale ... beware!

• Partial Elections: For mixed use, track proportions meticulously; CRA auditors love this.

• 2025 Updates: With rising rates and housing rules, more conversions trigger 13(7) – factor into flips or Airbnb plans.

Section 13(7) keeps CCA fair but complex – it's the CRA's guardrail against misuse. Here at Lakeshore, we are always on top of filing compliance and timely elections when it comes to change-in-use. If you're trying to wrap your head around all of it, don't stress. Call us today and let us handle it for you!