Principal Issues
Position
Expenditures made in respect of a rental property may be either current expenses or capital expenditures depending on the facts.
Expenditures that create an enduring benefit are generally capital in nature and are not immediately deductible, but are deductible over time under the capital cost allowance regime.
Expenditures that relate to repairs or maintenance that restore the property to its original condition are generally deductible in the year incurred.
Reasons
Paragraph 18(1)(a) of the Act provides that an expense is deductible only if it is incurred for the purpose of gaining or producing income, while paragraph 18(1)(b) denies the deduction of capital expenditures except as expressly permitted.
The determination of whether an expenditure is on account of income or capital is a question of fact and depends on the particular circumstances.
The courts have established a number of guidelines to assist in making this determination, including:
- whether the expenditure provides an enduring benefit;
- whether the expenditure constitutes maintenance or betterment;
- whether the expenditure relates to an integral part of the property or creates a separate asset; and
- the relative value of the expenditure in relation to the property.
An expenditure that restores a property to its original condition is generally considered a current expense, whereas an expenditure that materially improves the property beyond its original condition is generally considered a capital expenditure.
Where expenditures are predominantly current in nature, the CRA may, in certain circumstances, treat the entire amount as a current expense.
Expenditures that are capital in nature are not deductible in the year incurred but are added to the cost of the property and deducted over time through capital cost allowance.
There are no specific rules in the Act that determine the classification of each expenditure. The determination requires an assessment of all relevant facts and circumstances, having regard to the purpose of the expenditure from a practical and business perspective.
In computing income from a rental property, expenses incurred must also satisfy the general requirement of reasonableness under section 67 of the Act.
Where a property is temporarily vacant but continues to be held for the purpose of earning rental income, expenses that would otherwise be deductible do not cease to be deductible solely because of the vacancy, provided the property remains available for rent and efforts are made to secure a tenant.
Limitations
The classification of an expenditure as a current expense or capital expenditure is dependent on the specific facts and circumstances of each case.
Written confirmation of the tax consequences of particular transactions is provided only in the context of an advance income tax ruling request submitted in accordance with CRA administrative procedures.
