Since we are coming up to tax season, we want to provide some insight into tax implications of your rental property. Since it’s a fairly detailed subject, this will be covered in a number of posts. We are going to start by differentiating capital vs current expenses.
This article is based on information provided by the CRA, and so it should be accurate. However, it is providing guidelines only, and shouldn’t be interpreted as absolute. Ultimately, the CRA is the authority on CRA rules. So keep that in mind while you read this.
Ok, now that I’ve got the caveat out of the way, let’s talk expenses.
First, there are expenses that you can’t claim.
- You can’t claim the principal amount paid down on a mortgage as an expense. It’s not an expense, it’s a reduction of debt, or an increase in your net value.
- You can’t deduct land transfer taxes that you paid when you bought your property.
- You can’t deduct the value of your labour.
- If you live in the building and rent out part of it, you can only deduct the portion of expenses relevant to the rented part. For example, if you rent out half of your house, you can claim half of the expenses.
According to the CRA, there are 2 types of expenses, current and capital expenses. Generally speaking, a current expense is a expense that reoccurs after a short period. A capital expense is something that provides doesn’t reoccur with the same frequency. The example that the government uses is painting the exterior of a house (current) vs putting on new vinyl siding (capital).
If only it were that easy. Since it’s not, the CRA has 4 criteria that it considers when deciding whether something is a capital or current expense.
- Does the expense provide a lasting benefit? This speaks to the example of paint vs siding. If it does, it’s a capital expenditure.
- Does the expense maintain or improve the property? If the work you are doing brings the property to its original condition, it’s a current expense. If it is making the property better than its original condition, it’s a capital expense. For example, if you have a flood which destroys your floor, and you have to replace that floor to bring it back to what it was, that’s a current expense. If you decide to upgrade the floor at the same time and replace lino with hardwood, you’re looking at capital expenses.
- Is the expense for part of the property or a separate asset? For example, a refrigerator is a separate asset, so it’s a capital expense. If the motor inside the fridge fails and needs replacing, that’s a current expense.
- If we are unable to come up with a reasonable answer based on the first three criteria, there is one last question that we can answer to determine if it’s a current or capital expense. What is the value of the expense? If the expense is of “considerable value” in relation to the property, it’s considered a capital expense.
Current expenses are deducted within the year that they are incurred. Those are easy.
Capital expenses are deducted based on the class of the asset.
Now that we are able to distinguish between capital and current expenses, we need to learn how to account for them to the CRA.
Stay tuned for our next post, as we’re going to dive into a bit more detail on current expenses.