Overview
This ruling summarizes three CRA technical interpretations discussing the difference between capital improvements and current expenses for rental properties. These interpretations explain:
- When renovation costs must be capitalized
- When expenses may be treated as current deductions
- Whether rental losses remain deductible
- Deductibility of expenses while a rental property is vacant
- CRA policy and relevant Income Tax Act sections
The CRA emphasizes that determining whether an expenditure is capital or current is always a question of fact, dependent on the purpose and effect of the work performed.
1. Capital vs. Current Expenditures for Rental Property Renovations
(CRA Ruling 2009-034849 — Renovation Costs)
Key Issue
Whether approximately $20,000 of renovation work on a rental property should be treated as a capital expenditure or a current expense.
CRA Position
There are no fixed rules. Classification depends on the purpose and nature of the work. Courts apply several guidelines, including:
A. Enduring Benefit
If the renovation provides a lasting improvement to the property, it is likely a capital expenditure.
B. Maintenance vs. Betterment
- Work that restores property to original condition → usually current expense
- Work that improves the property beyond original condition → generally capital
If the majority of work is repairs (current), and only a minor part is capital in nature, CRA may treat the entire amount as current.
C. Integral Part vs. Separate Asset
Work creating a new asset or replacing an entire component often indicates capital.
D. Relative Value Test
If the cost of repairs is a small percentage of the property’s value, it may be considered current.
Rental Losses
CRA confirms rental losses can generally be deducted against other income sources, subject to normal rules.
2. Why Capital Improvements Are Not Immediately Deductible
(CRA Ruling 2012-044652 — Capital Improvements Policy)
Key Issue
Why improvements providing long-term benefit must be capitalized rather than deducted.
CRA Explanation
- Renovations creating enduring value must be capitalized and deducted gradually via capital cost allowance (CCA).
- Current expenses (repairs) are deductible immediately.
- The Income Tax Act does not include specific statutory rules distinguishing repair vs. improvement; therefore, the analysis relies on court decisions and practical business tests.
CRA refers taxpayers to Interpretation Bulletin IT-128R, which outlines:
- Maintenance vs. improvement guidelines
- Factors to determine if the expenditure results in a betterment
- Situations requiring capitalization
This ruling notes the CRA’s role is administrative, while tax policy concerns belong to the Department of Finance.
3. Expenses During Vacancy — Still Deductible?
(CRA Ruling 2013-047510 — Rental Property Vacant Periods)
Key Issue
Whether expenses incurred while trying to find a new tenant remain deductible when the property is vacant.
CRA Position
Yes — generally deductible, provided:
- The property continues to be held for the purpose of earning rental income
- The landlord is actively seeking a new tenant
- It is reasonable to expect a new tenant can be found
- Expenses (e.g., heat, water, electricity, maintenance) are of the type normally deductible
Relevant ITA Sections Considered
- 9(1) — Income computation
- 18(1)(a) — Expenses must be incurred to earn income
- 18(1)(b) — Capital outlays not immediately deductible
- 18(1)(h) — Personal expenses not deductible
- 67 — Reasonableness test
CRA Interpretation — Summary
Across all three rulings:
- Capital improvements that provide enduring benefit must be capitalized.
- Repairs and maintenance restoring original condition are typically deductible current expenses.
- Fact-specific analysis is required—no single factor is determinative.
- Rental losses may generally offset other income.
- Expenses during vacancy remain deductible if the property is still held for rental purposes.
Relevant Guidance & Resources
- CRA Interpretation Bulletin IT-128R: Capital Cost Allowance – Depreciable Property
- CRA Guide T4036: Rental Income
- Income Tax Act sections 9, 18, and 67
Disclaimer
This summary is based on redacted CRA technical interpretations. While believed to be accurate at the time of publication, CRA positions may change and may not reflect current administrative policy. This content is for general informational purposes only and should not be relied upon as tax or legal advice.
Redaction Notice
All personal names, contact details, file identifiers, and sensitive information from the original CRA documents have been removed to protect privacy and comply with publishing guidelines.
