A terminal loss occurs when the last property in a capital cost allowance class is disposed of for less than the undepreciated capital cost remaining in that class. The shortfall is deductible from income in the year of disposition, recognizing that the depreciation claimed over time was less than the property's actual decline in value.
A terminal loss is available only when no property remains in the class at year-end, so a single asset class is treated differently from a class containing several assets. Certain provisions deny or restrict terminal losses, particularly on some real-estate and non-arm's-length dispositions. Terminal losses and recapture are mirror concepts: one arises when proceeds fall below the undepreciated balance, the other when they exceed it.