By Gabor Palos – D&H Group LLP, Chartered Accountants
Owners of residential rental properties often spend significant money on the maintenance and improvement of their investments. And they often wonder whether they can deduct these expenditures on their income tax returns.
The answer is: it depends. The tax rule says that the cost of maintenance is deductible, but capital expenditures are not. How to tell the difference? Well, the difference is not always obvious and for that reason this area is the subject of frequent controversy between taxpayers and the Canada Revenue Agency (CRA).
Minor repairs and routine maintenance are considered “current expenses” and are deductible when incurred. A current expense simply restores the property to its original state, and has little or no long- term effect. These expenses usually recur after a relatively short period of time.
On the other hand, renovations that extend the useful life of the property and improve it beyond its original condition are considered “capital expenditures” and are not deductible when they are incurred. Instead, these expenditures may be deducted in small portions over time by claiming “capital cost allowance” (tax depreciation).
CRA provides some examples of current and capital expenditures in its interpretation bulletin: Painting the interior or exterior walls, repairing wooden steps, or replacing an old floor or a roof (unless the new floor or roof is clearly of better quality and greater durability) are all current expenses. Putting a vinyl siding on the exterior walls of a wooden house, replacing wooden steps with concrete steps, or replacing an air conditioning unit are all capital expenditures. Whether or not the market value of the property is increased as a result of the expenditure is not a major factor in this regard.
There are many tax rules dealing with the ownership of real property. The above are general comments only and are not meant to constitute professional advice. For an assessment of your particular situation please contact your tax advisor.